MNI WATCH: ECB Set To Hike 50Bps, March Projections Key

The European Central Bank is set to raise key interest rates by 50bps on Thursday, and to signal that another half-point hike will remain the starting point for discussions over the March monetary policy decision.

ECB President Christine Lagarde promised both continued 50bp hikes and a meeting-by-meeting, data-driven approach to rate setting in December, a combination which has brought criticism from some quarters for confusing messaging. This time she is likely to point to March’s Eurosystem staff macroeconomic projections as key, even as she repeats her message from Davos that rate-setters should “stay the course” in the face of above-target inflation.

While doves are pushing for a reassessment of the pace of hikes as sliding energy prices, a stronger euro and tighter financial conditions reduce headline inflation this year, more hawkish Governing Council members are concerned about sticky core inflation as improving economic sentiment heats tight labour markets and China emerges from Covid restrictions. (See MNI SOURCES: ECB Doves Eye Smaller Hikes As Inflation Falls)

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After a significant number of national central bank governors supported a 75bps rate rise in December, recent public statements suggest no Council member believes a pause in the hiking cycle is imminent. A cycle peak of at least 3.25% for the deposit rate is still the base case scenario, despite indications that headline inflation may fall at a faster pace than previously foreseen

The ECB is also set to announce detailed parameters for reducing its securities holdings under the Asset Purchase Programme, with a reduction in reinvestments of maturing bonds initially set at EUR15 billion from March. One option may be to confirm that remaining APP reinvestments will be directed towards green bonds, while shortening the maturity of future bond buys.