To The Moon

At 20:15 SGT on Thursday, the ECB will announce its interest rate resolution. Policymakers are faced with two choices: a significant 50 basis points or more to curb record high inflation.

Investors see rising odds of a 75 basis point rate hike since the eurozone achieved record inflation of 9.1% last week. ECB will also face pressure to take tough measures before economic conditions deteriorate.

Mike Riddell, senior fixed income portfolio manager at Allianz Global Investors, said,

It feels like the ECB is still behind other central banks right now, which makes it more likely that they will raise rates by 75 basis points and remain hawkish.

European gas prices spiked again on Monday and the euro fell after Russia shut down its gas pipeline to Europe, which could strengthen the case for a more aggressive move by the ECB.

However, what other key issues will the market focus on before the interest rate resolution releases?

1. Does the magnitude of the rate hike matter?

A stronger rate hike would show the ECB's determination to curb inflation and help improve the ECB's credibility. In July, the ECB chose to raise 25bps as other major central banks raised rates in a big way.

The market currently expects the ECB to raise rates by 50 bps on Thursday. However, a growing number of institutions, including Goldman Sachs, have increased their bets on a 75 bps rate hike.

Francois Villeroy de Galhau, a member of the Governing Council, said

the next interest rate hike must be firm, but in an orderly and predictable manner.

Flavio Carpenzano, head of fixed income investments at Capital Group, said:

The ECB is currently behind the curve and will have to tighten monetary policy significantly until early 2023. At that point we will see the consumer price index topping out.

2. How fast will inflation fall?

ECB's latest economic forecast released on Thursday will likely see inflation remaining high for a longer period of time.

ECB policymakers and analysts have delayed expectations of when inflation will top out. Soaring gas prices are further complicating the outlook as Russia recently shut down Nord Stream 1 to Europe. People are concerned that soaring gas prices will keep inflation high.

Against this backdrop, ECB President Lagarde may not be willing to reveal forecasts of when inflation will top out. Instead, Berenberg expects eurozone inflation to exceed 10% in the fourth quarter before falling slightly in early 2023.

3. Energy crisis will make a recession inevitable?

Economists believe that energy crisis will become increasingly severe. Especially with winter approaching and energy shortages looming, forward-looking indicators paint a bleak picture.

Natural gas prices have risen 30% on Monday.

Villeroy from ECB said

Europe seems unlikely to see a recession, but we can't rule out the possibility of a recession next year.

While the German central bank said last month,

as the eurozone's largest economy, the possibility of Germany's recession is increasingly likely.

4. What is the impact of a weak euro on the policy outlook?

A weaker euro would make imports more expensive, providing a case for more aggressive rate hikes.

On Monday, the euro fell below 0.99 against the dollar for the first time in nearly 20 years and accumulated a decline of nearly 13% so far this year.

In the minutes of the July meeting, ECB raised concerns about the weakness of the euro.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said:

The ECB has always said that it is not the level of the euro exchange rate that matters, but the speed of exchange rate movements. The market saw a time when the euro exchange rate falls below parity, but they don't want another 5-10% fluctuation in the euro.

5. When will the ECB start tapering?

Market believes that ECB is unlikely to discuss the taper of 3.3 trillion euro ($3.3 trillion) asset purchase program. But the issue will likely be raised at the press conference.

Now that the Federal Reserve has begun to reduce its balance sheet. Tapering will also be the next step for ECB policy.

But recent comments by Dutch central banker Klaas Knot and others suggest that,

for now, raising interest rates remains the ECB's top priority.

What's your opinion towards ECB's upcoming rate hike?

Will the hike affect your portfolio or life?

Share your thoughts in the comment section~