With the fight against inflation likely to prove tougher than expected, Fitch Ratings is raising its forecast for rate hikes from the European Central Bank (ECB).
In a new report, the rating agency said that it now expects the ECB to raise its refinancing rate to 4% by May, up from its previous forecast for rates to hit 3%.
Fitch said that it now expects 150 basis points in rate hikes in the first half, starting with 50-bps hikes at the central bank’s upcoming meetings in February and March.
The revised forecast reflects the sense that the ECB “has become much more concerned about core inflation pressures and has signalled that rates will peak at a higher rate than Fitch expected in its December forecast,” the report said.
Over the past few months, “ECB guidance has changed substantially,” it said, with expectations shifting from monetary policy returning to neutral to it turning “restrictive” to combat robust core inflation.
While headline inflation may have peaked, thanks to declining energy prices, and an easing in food price pressures, core inflation continued to rise in December, Fitch said.
“Labour markets are tight in many of the main Eurozone economies, fuelling upward pressure on wage growth,” it also noted.
Against this backdrop, Fitch said the ECB “has become much more concerned about inflation broadening and becoming more entrenched in the last month or so.”
The rating agency said that it expects Europe to experience a mild contraction in GDP in the first quarter, and to eek out a small gain (0.3%) for the year ahead.