# No messing around with red-hot inflation: Five questions for the ECB
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-10-24
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: ECB Expected to Raise Rates by 75 bps Amid Hot Inflation
Meta Description: The European Central Bank (ECB) is set to announce a 75 bps rate increase, signalling a hawkish stance despite dimming economic outlook and potential recession
URL: https://financedigest.com/no-messing-around-with-red-hot-inflation-five-questions-for-the-ecbhtml

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By Dhara Ranasinghe, Stefano Rebaudo and Kripa Jayaram

LONDON (Reuters) – The European Central Bank meets on Thursday and appears in no mood to slow the pace of aggressive interest rate hikes given red-hot inflation — even as the economic outlook darkens.

It has jacked up rates by a total 125 basis points (bps) since July, the fastest pace of policy tightening on record.

Recession risks are unlikely to stand in the way for now, but [markets are looking for signs on when a pause might come](https://www.financedigest.com/constructive-digitization-to-let-the-antibody-testing-market-come-of-age.html "Constructive digitization to let the Antibody Testing Market come of age").

The central [bank has few options but to deliver another huge rate hike](https://www.financedigest.com/big-ecb-hike-adds-fuel-to-the-banking-sector-fire.html "Big ECB hike adds fuel to the banking sector fire") and sound hawkish,” said Nordea Chief Analyst Jan von Gerich.

Here are five key questions on the [radar for markets](https://www.financedigest.com/automotive-radar-market-surveys-opportunity-growth-and-forecast-by-end-use-industry-2021-2031.html "Automotive Radar Market Surveys, Opportunity, Growth and Forecast by End-use Industry 2021-2031").

1/ What will the ECB do this week?

Economists polled by Reuters anticipate a 75 bps rate increase to 1.5%, a view reflected in [market pricing](https://www.financedigest.com/analysis-oil-prices-turn-more-volatile-as-investors-exit-the-market.html "Analysis-Oil prices turn more volatile as investors exit the market"). Policymakers have argued for a large [rate hike](https://www.financedigest.com/bank-of-england-set-to-hike-to-4-as-rate-peak-looms.html "Bank of England set to hike to 4% as rate peak looms"), with most specifying a preference for 75 bps.

The [ECB might announce a possible change](https://www.financedigest.com/explainer-oil-price-surge-changes-ecb-narrative-only-at-the-margins.html "Explainer-Oil price surge changes ECB narrative only at the margins") to the rules governing cheap long-term loans, Targeted Longer-Term Refinancing Operations (TLTRO).

Investors will also look to [ECB boss Christine Lagarde for guidance on how the ECB views the trade-off between recession risks and inflation](https://www.financedigest.com/big-fall-in-euro-zone-inflation-offers-little-help-for-ecb.html "Big fall in euro zone inflation offers little help for ECB"), and when it might pause tightening.

It makes sense to expect a 75 bps rate hike, signals about the [ECB reducing its balance sheet and changing rules about the TLTRO to reduce excessive liquidity,” said Deutsche Bank’s Global Head of Rates](https://www.financedigest.com/fed-rates-up-boe-up-ecb-up-stocks-up.html "Fed rates up, BoE up, ECB up, stocks up") Research Francis Yared. “What is unclear is how much of all this the ECB will announce (this week).”

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/10/rate-hike.jpg)

2/ Is there any indication inflation is peaking?

Economists [say it’s too early to call a peak in inflation](https://www.financedigest.com/bank-of-england-raises-rates-to-3-5-says-inflation-has-peaked.html "Bank of England raises rates to 3.5%, says inflation has peaked") but the chances of one arriving soon are growing. Inflation has accelerated to almost 10%, a level not [seen in some euro zone](https://www.financedigest.com/euro-zone-inflation-seen-just-above-ecbs-target-in-2025-poll-shows.html "Euro zone inflation seen just above ECB’s target in 2025, poll shows") countries for over 70 years.

One reason for [optimism is that European](https://www.financedigest.com/european-shares-end-higher-on-china-recovery-optimism.html "European shares end higher on China recovery optimism") gas prices are down 65% from a peak in August.

While an inflation [peak may be close](https://www.financedigest.com/ecbs-centeno-says-interest-rate-close-to-peaking-if-no-new-shocks.html "ECB’s Centeno says interest rate close to peaking if no new shocks") if there are no additional shocks from the war in Ukraine, the retreat will be slow initially, ECB policymaker Bostjan Vasle believes.

Another problem is that [inflation is broad so even when the headline figures fall](https://www.financedigest.com/boes-mann-falling-headline-inflation-high-core-make-policy-difficult.html "BoE’s Mann: Falling headline inflation, high core, make policy difficult"), underlying price growth will remain uncomfortably high.

The [inflation peak is crucial for whether policymakers will need](https://www.financedigest.com/bank-of-england-still-needs-to-see-the-job-through-on-inflation-pill.html "Bank of England still needs to ‘see the job through’ on inflation: Pill") to push rates beyond the neutral setting – where they neither stimulate nor slow growth — a rate generally pegged at between 1.5% and 2% but that some policymakers think is too low.

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/10/eurozone-inflation.jpg)

3/ Are we about to get QT?

Not just yet. But the ECB could tweak its language on reinvestments and [provide more details in coming months](https://www.financedigest.com/independent-study-finds-infinidat-storage-can-provide-customers-125-roi-over-three-years-and-payback-in-less-than-six-months.html "Independent Study Finds INFINIDAT Storage Can Provide Customers 125% ROI Over Three Years and Payback in Less than Six Months").

The next [key policy debate is on how to run down the more than 5 trillion euros worth of bonds on the ECB](https://www.financedigest.com/morgan-stanley-others-now-forecast-4-peak-for-key-ecb-rate.html "Morgan Stanley, others now forecast 4% peak for key ECB rate") balance sheet in a process called quantitative tightening (QT).

Bundesbank President Joachim Nagel and [Dutch central bank](https://www.financedigest.com/dutch-online-bank-bunq-applies-for-u-s-banking-licence.html "Dutch online bank Bunq applies for U.S. banking licence") chief Klaas Knot have said the time for QT, part of broader policy tightening, is approaching.

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/10/easy-money-era.jpg)

4/ Is the [ECB giving away cash to banks](https://www.financedigest.com/ecb-raises-interest-rates-again-cuts-bank-subsidies.html "ECB raises interest rates again, cuts bank subsidies") and what will it do about it?

Euro [zone banks sit on 2.1 trillion euros of cash handed out by the ECB](https://www.financedigest.com/euro-zone-consumers-more-optimistic-on-inflation-ecb-survey-shows.html "Euro zone consumers more optimistic on inflation, ECB survey shows") at ultra-low, sometimes even negative rates, aimed at boosting the economy.

But quick and big rate [hikes mean banks can park this cash back](https://www.financedigest.com/uks-bellway-to-buy-back-shares-hike-social-housing-output.html "UK’s Bellway to buy back shares, hike social housing output") at the ECB, earning a risk-free profit, irking policymakers who view it as gaming the system.

Policymakers are believed to be closing in on a deal to change rules governing the loans to banks, a move that would shave tens of [billions of euros off in potential banking](https://www.financedigest.com/first-abu-dhabi-bank-could-renew-35-billion-offer-for-stanchart-bloomberg-news.html "First Abu Dhabi Bank could renew billion offer for StanChart -Bloomberg News") profits. A decision could come on Thursday.

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/10/ecb-cash.jpg)

5/ How [worried is the ECB about financial](https://www.financedigest.com/why-finance-needs-to-collaborate-to-get-rid-of-internal-worries.html "Why finance needs to collaborate to get rid of internal worries") instability?

Aggressive [rate hikes from major central banks](https://www.financedigest.com/ecbs-villeroy-rate-hike-signals-strong-confidence-in-european-banks.html "ECB’s Villeroy: rate hike signals strong confidence in European banks") and a rout in British bonds have sparked concern about financial instability.

The [International Monetary Fund says financial](https://www.financedigest.com/the-hidden-financial-woes-of-international-students-heading-for-the-uk.html "The Hidden Financial Woes of International Students Heading for the UK") stability risks have risen “substantially” and Lagarde has warned that markets may be overly optimistic about the economic outlook, raising the risk of an abrupt market correction.

The critical issue for markets is financial stability,” said Flavio Carpenzano, fixed income investment director at Capital Group, although he doesn’t [expect the ECB](https://www.financedigest.com/hawkish-ecb-comments-push-up-rate-hike-expectations.html "Hawkish ECB comments push up rate-hike expectations") to address it directly.

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/10/Worries-about-financial-stability-risks-are-growing.jpg)

(Reporting by Dhara Ranasinghe in [London and Stefano Rebaudo in Milan; Graphics by Kripa Jayaram and Vincent Flasseur; Editing by Tommy Reggiori Wilkes and Andrea Ricci)](https://www.financedigest.com/london-fears-losing-luxury-shoppers-to-paris-and-milan.html "London fears losing luxury shoppers to Paris and Milan")


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