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Banks call 75 bps ECB October rate hike

·2-min read

By Dhara Ranasinghe

LONDON (Reuters) -Banks including Deutsche Bank and BofA said on Friday they expect another 75 basis point rate hike from the European Central Bank in October, a day after the central bank delivered a supersized interest-rate rise of that size to tame inflation.

The ECB raised its key rates by an unprecedented 75 basis points (bps) on Thursday and promised further hikes, prioritizing the fight against inflation even as the bloc is likely heading towards a winter recession and gas rationing.

"It is likely to be another close call in October and we have shifted our view to expect another 75 bps hike," Deutsche Bank analysts said in a note, from its previous call of 50 bps.

They noted guidance from ECB chief Christine Lagarde that rates are "far away" from levels appropriate for getting inflation back to target in a timely fashion and that hikes should be anticipated at the "next several meetings."

"This underscores the ECB's insensitivity to the growth headwinds and laser focus on bringing inflation down," the Deutsche note said.

BofA and Credit Suisse said they had also revised up their calls for a 75 bps ECB rate hike in October versus previous expectations for a 50 bps move.

Credit Suisse noted the ECB's language pointed to more aggressive tightening ahead, and also lifted its forecast for the ECB rates to peak at 2.5%, from a previous estimate of 2%.

Money markets were on Friday fully pricing in a 50 bps rate hike in October and implied a roughly 25% chance of a more aggressive 75 bps move.

Still, anticipation of a more hawkish stance from the ECB appeared to be supporting the euro, which was trading back above $1 on Friday.

BofA analysts added that faster and more aggressive tightening now would likely force the ECB to cut rates earlier.

"We now pencil in the first 25bp cut by June 2024, with two additional 25bp cuts in September and December," BofA said.

Citi said it continued to expect a 75 bps ECB hike in October and a 50bp hike to 2% in December before the weak economy stops further hikes.

(Reporting by Dhara Ranasinghe and Lucy Raitano , editing by Karin Strohecker and Jonathan Oatis)