The ECB's deposit rate could reach 4% by the end of the summer, HSBC analysts wrote in a report, with the ECB continuing to raise rates even after the summer period.
HSBC is forecasting two 25 basis point hikes in July and September, in addition to a quarter point hike for the next June meeting, with deposits potentially hitting 400 basis points from the current 325 basis points.
Rates for the main refinancing operation and the marginal lending facility are now at 3.75% and 4.00% respectively, after an overall increase in recent months of 375 basis points, the largest in the ECB's short history.
According to HSBC, there are five reasons why the bank led by Christine Lagarde will continue to raise the cost of money:
1) Activity remains encouraging in the service sector. Income pressures are easing and consumer confidence is at an all-time low.
2) The labor market remains relatively tight and wage growth continues to increase.
3) Productivity is weak, in addition to wage increases indicating growth in firm labor costs is higher than is consistent with the 2% inflation target.
4) Policymakers think there is "more ground to cover" and some want to raise rates until they see signs that core inflation is falling on a "sustained basis", which we don't think will happen until after the summer.
5) Fiscal policy remains supportive as well, with funds for energy support measures reallocated to more general spending and extensive tax credits.
The bank also issued a warning about the consequences of a rapid rise in the cost of money, leading to indications that monetary tightening is starting to take effect and how the transmission of monetary policy works with "long and variable delays."
According to HSBC, the European zone's dependence on bank loans can lead to higher risks.
