ECB to hold fire in May, next hike seen in July

The European Central Bank will not raise interest rates again until July as it follows a steady path of policy tightening to rein in inflation while still supporting growth, a Reuters poll showed on Thursday. The poll of 76 economists, taken over the past week, found none of them expect a rate hike when the Governing Council meets on May 5 and only 17 of them predict a rise from the current 1.25 percent before the next quarter.
Over half, 44 of 74 analysts, said the ECB would next move in July, raising its key rate by another 25 basis points. That compares with 30 of 62 economists in an April 7 Reuters poll who saw the next rate rise in July. Euribor futures - which show market expectations for interbank rates - indicate that the next rate hike is priced in for some point between June and September.
The ECB was the first of the big four central banks to raise rates when it lifted its benchmark rate by 25 basis points from a record low this month. The poll forecasts the bank will continue to gradually tighten policy with similar hikes each quarter through to the middle of next year.
"The ECB feels it was justified in a steady series of increases in 2005/06 and does not seem set to be deflected this time," said Philip Shaw at Investec. "However, unless we are underestimating the momentum of the euro area economy, we tend to the view that there will be a pause in the tightening cycle at some stage, possibly next year," he said. The poll predicted interest rates would end the year at 1.75 percent, in line with overall expectations in financial markets. Rates are set to end 2012 at 2.5 percent, unchanged from a Reuters poll taken earlier this month.
The eurozone economy grew 0.3 percent in the final three months of last year, and is expected to have grown 0.5 percent in the first quarter of 2011, but recent data suggests a strong Germany is masking a still struggling periphery. "We still believe that the sovereign debt crisis and the strength of the euro will be factors that should contain ECB aggressiveness this year," said Elwin de Groot at Rabobank.
Portugal was forced to follow Greece and Ireland earlier this month and seek an international bailout, ending months of resistance to foreign aid that led to a credit rating downgrade and a sharp rise in borrowing costs. Borrowing costs are on the rise again for all three bailout recipients, putting further pressure on them to cut spending, on growing fears that Greece will have to restructure its debt.
Inflation in the 17-nation bloc was running at 2.7 percent in March, above the ECB's 2 percent target ceiling for the fourth month, and is not seen falling below 2 percent until the second quarter of next year. Governing Council member Athanasios Orphanides said on Wednesday that further interest rate rises may be warranted if the inflation outlook deteriorates further this year.
His colleague, Jose Manuel Gonzalez-Paramo, said on Tuesday that eurozone rates are unusually accommodative and people should expect cheap money to come to an end. "The majority of ECB speakers have been stressing the accommodative stance of policy and the upside risks to inflation, implying that rate hikes will continue," said Ken Wattret at BNP Paribas.
As part of its loose monetary policy the ECB has been meeting banks' demand for cash in full since the financial crisis intensified in late 2008. The periphery's mounting debt problems prevented the bank from switching its three-month lending operations back to competitive auctions, as it had been expected to late last year. Economists were split as to whether the ECB would move to variable rate tenders at its refinancing auctions to improve the effectiveness of this month's rate hike. Thirty two of 58 said that it would, with virtually all of them plumping for the second half of this year.