ECB hawks set to prevail 'with half point rate hike next week'

Policymakers will vote to increase rates by 50 basis points instead of a widely-anticipated 25 basis point hike, because core inflation remains stubbornly high, economist says

Economists cite manufacturing and employment surveys, as well as the calming of last month's turmoil on global banking markets, for reasons the ECB will drive ahead with rate increases.  

European Central Bank hawks are likely to hold out and hike interest rates by a hefty half a point next week, after rapid fire increases since last summer failed to halt significant price pressures, a leading economics consultancy has predicted. 

In a major study, Capital Economics said almost every one of the 26 policymakers on the governing council at the ECB has publicly voiced opinions on the May 4 meeting, and the consultancy believes they will vote to increase rates by 50 basis points instead of a widely-anticipated 25 basis point hike, because core inflation remains stubbornly high across the eurozone. 

Andrew Kenningham, chief Europe economist at Capital Economics, said ECB policymakers will be "sure to judge that economic activity is stronger than they had anticipated in March", when the ECB last produced three-monthly economic forecasts.

There will be no new forecasts published at Thursday's meeting.   

"Looking ahead to next year, we have pencilled in more rapid ECB rate cuts than are currently priced in by financial markets," Mr Kenningham said. 

"Core price pressures should eventually ease, in part because the labour market will weaken to some extent," he said. 

Economists cite manufacturing and employment surveys, as well as the calming of last month's turmoil on global banking markets, for reasons the ECB will drive ahead with rate increases.  

Irish economists said official figures published on Thursday purporting to show the economy here contracted sharply in the recent months will likely be revised at a later date. 

Conall Mac Coille, chief economist at Davy, said in the past there had been outsized revisions of partial economic official data. And more timely figures, including unemployment, employment and the exchequer returns, suggest the economy is set to grow this year, he said.

The Government, the International Monetary Fund, and the Central Bank have all projected in the last month that GDP will grow by about 5.5% this year.    

The Central Statistics Office said its preliminary estimate showed GDP had contracted by 2.7% from the previous three months, but was 6.4% higher from the first quarter last year.      

"If GDP has fallen by 2.7% in the first quarter, which you can't rule out, it most certainly reflects the volatile multinational sector," Mr Mac Coille said.  

"Irrespective of the conditions in multinationals, we haven't seen any weakness in the corporation tax receipts, and this [the CSO estimate] probably reflects the measurements rather than underlying conditions," he said.  

Economist Jim Power said exports in the first three months have been "less stellar" than last year, mostly because the chemical and pharma sector, which is dominated by the multinationals and accounts for a huge slice of overall Irish exports, has been slowing.

"There is nothing remotely surprising about this softening in growth in the first quarter when you think about the uncertain global climate in the first quarter," Mr Power said. 

Indicators of the economy such as employment and tax revenues will persuade the Department of Finance not to downgrade its recent economic forecasts for the full year, he said.