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NEW YORK, March 17 — Goldman Sachs and two other banks expect the European Central Bank to deliver a smaller quarter-point hike in May as it grapples with stress in the banking sector and high core inflation.

Goldman earlier expected the ECB to deliver a 50 bps hike in May. The Wall Street bank’s terminal rate forecast now stands at 3.5 per cent, down from 3.75 per cent previously.

The change in forecast follows the ECB’s decision to press ahead with a 50 bps hike, taking the deposit facility rate to 3 per cent, despite calls from some rate-setters for a smaller raise amid uncertainty in the banking sector.

A rout in global markets triggered by the collapse of Silicon Valley Bank and Signature Bank, worsened by doubts around the future of First Republic Bank and Swiss lender Credit Suisse, have raised questions about whether central banks would temper the pace of their rate hikes.

“We believe that further rate hikes (by the ECB) are likely despite the financial market volatility because the risk of severe banking sector contagion still looks limited and core inflation is likely to remain strong in coming months,” Goldman Sachs economists, led by Sven Jari Stehn, said in a note dated March 16.

HSBC says it has retained its ECB terminal rate forecast at 3.5 per cent, but now expects the central bank to deliver two smaller 25 bps hikes in May and June, as opposed to earlier expectations of a 50 bps hike in May. Barclays holds the same view.

Traders see the ECB rate peaking at around 3.23 per cent by September or October.

Meanwhile, JP Morgan, Deutsche Bank and Swedish Bank SEB expect the ECB to deliver a 50 bps hike in May but warned of downside risks to their forecasts given current market volatility and inflation remaining well above the central bank’s target.

The ECB cut its inflation projections on Thursday to 5.3 per cent for 2023, but data still points to price growth above its 2 per cent target. — Reuters