Title: Confronting the inflation beast: Five questions for the ECB

Jun 06, 2022 02:10AM ET

By: AnalysisWatch

It's all but certain that the European Central Bank will announce on Thursday that years of bond purchases are over and that high inflation means interest rates will be raised soon.

Markets want more clarity on what comes next and whether policy tightening could be accelerated to get ahead of rising prices.

The ECB will almost certainly announce that it will end its bond purchases mid-year, paving the way for a July rate hike that will be the first since 2011.

Lagarde has said the -0.50% deposit rate should be at zero or "slightly above" by the end of September, implying an increase of at least 50 basis points (bps) from current levels.

Policymakers are also likely to reaffirm their commitment to reinvest the proceeds of maturing bonds into the market to support the weaker eurozone economies.

Economists and markets expect a 25 basis point rate hike in July, but speculation about a larger move has increased and been fueled further by euro area inflation, which hit record highs in May.

The central bank governors of the Netherlands, Austria, Latvia, and Slovakia consider a 50 basis point hike an option.

Statements by Lagarde ahead of the latest inflation figures pointed to a 25 basis point increase, but also left the door open for larger moves in the coming months.

With euro area inflation accelerating to 8.1% in May, four times the ECB's 2% target, Lagarde will be asked about the scope for a larger rate hike.

Well, Lagarde has hinted at further rate hikes toward or even above the neutral level, so a sense of where the ECB places the neutral level would give an indication of how far it sees rates rising.

The neutral rate is an unobservable rate that brings economic output in line with its potential and is neither stimulative nor restrictive.