The European Central Bank is set to raise interest rates for a fourth straight time on Thursday, albeit probably by a smaller increment, and lay out plans to drain cash from the financial system as it fights runaway inflation.
This created the need for compromises around the path for rates and the pace of the ECB's unwind of its bond portfolio - known in market parlance as quantitative tightening .
"Horse-trading remains the essence of ECB policymaking," Davide Oneglia, an economist at consultancy TS Lombard. "The counterpart of slower rate hikes will be hawkish guidance on the terminal rate ... accompanied by earlier or faster 'passive' QT."Some on the ECB's Governing Council, such as Bundesbank President Joachim Nagel, have called for QT to start by March or even earlier, while more dovish members are hoping for a later launch.in the third quarter.
Overall, the ECB is seen letting 175 billion euros worth of debt expire next year, according to a Reuters poll, pointing to a 15-20 billion euro monthly reduction depending on the start date. Lagarde is expected to face questions about how far the ECB intends to raise rates and reduce its bond holdings - and about the interplay between both."A key difficulty is that the ECB does not know how high it will have to go, reflecting huge uncertainty about both transmission and the inflation outlook," Greg Fuzesi, an economist at JPMorgan, said.
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