Goldman Sachs Expects 50 bps Rate Hike by European Central Bank in May

Goldman Sachs revised up its prediction for the European Central Bank’s next interest rate hike, expecting that the central bank would lift a rate by 50 basis points at the meeting in May. As a result, the terminal rate would peak at roughly 3.75% by June.

The bank had previously estimated that the ECB would raise rates by 25 basis points in May, reaching a maximum of 3.5% in June.

The central bank increased interest rates by a total 3.0% since July and promised another hike in March in the hopes that the higher cost of borrowing will slow inflation from its current above-8% level.

Other recent data, such as an upside surprise in Spanish and French inflation numbers, as well as recent commentary from ECB president Philip Lane, who suggested that the central bank will not end rate hikes any sooner, encouraged the firm to adopt a more hawkish outlook.

Philip Lane, ECB’s chief economist, stated earlier this week that he expects rate hikes to continue until the bank is confident that inflation will return to its target rate of 2%, even if inflationary pressures in the Eurozone have eased recently.

Lane suggested three requirements that could halt the ECB from hiking rates. The central bank must both reduce inflation expectations across its three-year forecast horizon and achieve tangible reductions in underlying inflation. After all is said and done, it must decide if monetary policy is successful.