Christine Lagarde, President of the European Central Bank (ECB).
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Goldman Sachs changed its expectations for European Central Bank policy, saying recent data, comments from board members and diminishing concerns about the banking sector have allowed further hawkish action.
The investment bank had lowered its expectations for the ECB’s final key rate to 3.5% following the collapse of Silicon Valley Bank earlier this year. The event raised concerns that central banks were moving at too fast a pace and needed to take a break from raising rates.
However, “banking strains have eased in recent weeks as the risk of a US banking crisis has fallen sharply and European banks’ equity/wholesale funding measures have retraced much of their sharp decline in early March,” Goldman Sachs analysts said in a statement. research note Monday.
The bank now thinks it will stop the rise (the so-called terminal rate) at 3.75%. The ECB’s benchmark rate has been at 3% since its last rate decision in March.
Additionally, Goldman Sachs said inflation data is still “very strong,” fueling the case for further rate hikes. Headline inflation in the euro zone fell to 6.9% in March, according to preliminary data. In February, the overall rate was 8.5%.
Despite this decline, core inflation – which excludes volatile energy, food, alcohol and tobacco prices – rose slightly from the previous month, underlining the persistence of high prices in the economy of the region.
Olli Rehn, Governor of the Bank of Finland and ECB board member, said “inflation is still way too high.” Speaking to CNBC last week during the IMF’s spring meetings, he added that the central bank must “continue and act consistently.”
At the March meeting, the ECB provided no guidance for upcoming rate decisions, saying these will be data-dependent and happen meeting by meeting.
However, ECB watchers are expecting a rate hike of 25 or 50 basis points at the Governing Council meeting next month.
“We see the choice between 25 basis points and 50 basis points in May as a tough choice given the decline in banking risks, the resilience of growth and the continued strength of underlying inflation,” said Goldman Sachs.
However, the investment bank is currently assuming that the ECB will push rates up 25 basis points at meetings in May, June and July.
“Reasons for a more gradual tightening from here include that recent banking strains are likely to leave some mark on bank lending, we expect some cooling in sequential underlying inflation in the months ahead. ahead and uncertainty around the global outlook has increased,” he added. analysts said.