Two ECB rate hikes expected ahead of quantitative tightening

Economists believe that the European Central Bank will raise interest rates two more times as part of its policy aimed at combating unprecedented inflation, including by half a percentage point next week.

Borrowing costs are forecast to be increased by the same amount at the February meeting, leading to the deposit rate peaking at 2.5%. Economists also believe the ECB will start dumping trillions of euros in crisis-era bond purchases around the next quarter.

Even with such a tight monetary policy, economists say that the ECB is still not fighting inflation enough. In the meantime, the Federal Reserve is signaling that a slowdown in rate hikes is expected.

Price growth in the Eurozone slowed down in November, but it will remain elevated for the time being due to the energy crisis. Inflationary pressures will continue, and at the same time, the ECB is expected to scale back its rate hikes.

But the further policy could become more complex as the process of reducing nearly $5.3 trillion in debt, i.e. quantitative tightening, begins.

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Consumers say policymakers haven’t done enough, with expectations for inflation over the next year rising to 5.4% in the ECB’s latest monthly survey and remaining at 3% three years later.

The economic outlook for the eurozone is worsening, and the slowdown coincided with even some of the most hawkish members of the Board of Governors cutting their calls for tightening by more than 50 basis points in December.

While money markets see the final rate closer to 3%, they are also betting that the ECB’s next move will be a half-point hike.

While the Board of Governors will unveil a general quantitative tightening plan next week, details on the timing and scope are not yet clear.