The European Central Bank will pull the plug on years of stimulus on Thursday and signal a string of rate hikes to fight surging inflation, leaving markets only to guess the size and speed of policy tightening.
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Details remain elusive, however, as predicting inflation has proven impossible, suggesting the ECB will only signal its initial steps on Thursday and maintain plenty of discretion further down the line. While the bank has signaled a preference for 25-basis-point hikes, the energy-driven surge in prices could change that in just weeks. A handful of policymakers have already said that a bigger increase needs to remain in play.
“We currently view a 50-basis-point hike in July as possible but unlikely. In contrast, a 50-basis-point hike in September is as likely as it is unlikely at this point.”Markets are pricing in 135 basis points of rate hikes by the end of this year, or an increase at every meeting from July, with some of the moves in excess of 25 basis points.
The ECB’s first rate hike in over a decade would still leave it trailing most of its global peers, including the US Federal Reserve and the Bank of England, which have been raising aggressively and promising even more action. The main refinancing rate is formally the ECB’s benchmark but it has used the rate on its overnight deposit facilities for banks as its main policy rate for much of the past decade given that banks have piled up hundreds of billions of euros worth of excess liquidity.
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