(CORRECTED) ECB WATCH: ECB Set To Reduce Hiking Pace

(Corrects size of ECB balance sheet in first paragraph)

The European Central Bank appears poised to raise its deposit rate by 50bps to 2% on Thursday, reducing its tightening pace after two consecutive 75bp increases, and will also provide broad principles for plans to shrink its roughly EUR5 trillion securities balance sheet.

While some Governing Council members are likely to favour a 75bp hike, sources have told MNI that a smaller increase is likely if not guaranteed. While there is no easy equivalence with rates policy, hawks might push for an earlier start to quantitative tightening, which will see a reduction in reinvestments of maturing debt under the ECB’s Asset Purchase Programme. (See MNI SOURCES: Rates/QT Trade-Off Central To Next ECB Decision)

Policymakers will also point to further, possibly smaller rate hikes still to come in order to tame inflation, while acknowledging the lag-effect of past policy decisions and the dampening impact on prices of Europe’s economic slowdown. But, with uncertainty still elevated, President Christine Lagarde will insist again on a data-led, meeting-by-meeting approach to rate-setting, while stressing she remains watchful for evidence of second-round effects and inflationary fiscal policies.

December’s Eurosystem staff growth and inflation projections will be key, with sources suggesting inflation could be seen converging to just above the ECB’s 2% target by the end of the forecast horizon in 2025.

The early repayment last week of EUR447.5 billion of cheap loans to banks under the Targeted Longer-Term Refinancing Operations III programme will be welcomed by the Governing Council, but is not expected to alter materially the timing and pace at which the ECB reduces its bond holdings.

Lagarde will also face questions about the level of interest rate payments made to banks parking excess liquidity in the ECB’s coffers at Thursday meeting, which comes one week after the Belgian National Bank reported its biggest-ever post-war losses, with liabilities exceeding assets by 2027.