Is ECB Ready For A Dovish Shift?

(RTTNews) - The European Central Bank is widely expected to slow the pace of its interest rate hikes to 50 basis points on Thursday, taking cue from its peers as inflation have come off slightly in several countries on the back of a modest easing in energy prices. However, recent economic data and surveys as well as the rhetoric from ECB policymakers apparently suggest otherwise as they point to above-target inflation in the months ahead.

The central bank for the 19-nation single currency bloc is set to announce the interest rate decision at 08:15 AM ET on Thursday when rates are widely expected to be raised by 50 basis points.

The main refinancing rate is currently at 2.00 percent. The deposit facility rate is at a 13-year high of 1.50 percent and the marginal lending rate is at 2.25 percent.

The Governing Council, led by ECB President Christine Lagarde, has already raised rates by 200 basis points this year, which is the fastest pace of monetary tightening in the central bank's history, to rein in the runaway inflation.

The ECB chief is set to hold the customary post-decision press conference at 08:45 AM ET.

The first ECB rate hike this year was a 50 basis points raise in July, which was also the first since the same month of 2011. That was followed by two jumbo rate hikes of 75 basis points each, in September and October.

The central bank is also expected to announce plans to reduce its bond holdings, but refrain from unveiling any concrete measures.

Recent easing in euro area inflation and improvement in sentiment indexes fueled expectations that the ECB is likely to turn somewhat dovish this time. That said, indicators for the manufacturing and services sector have been increasingly giving out signs of an economy sliding into recession.

Lagarde is also set to release the latest set of ECB Staff macroeconomic projections on Thursday that are expected to forecast inflation staying above the bank's target of 2 percent through 2024, and returning to target only in 2025. Yet, a 75 basis point hike is not off the table, some economists said.

Eurozone inflation slowed for the first time since the middle of 2021 during November. Headline inflation rate fell to 10.0 percent from 10.6 percent. Meanwhile, core inflation held steady at 5.0 percent.

"The drop in headline inflation, as little as it says about the impact of the rate hikes so far, could at least take away some of the urgency to continue with jumbo rate hikes. It's symbolic," ING economist Carsten Brzeski said.

"At the same time, the ECB seems to be increasingly concerned that the fiscal stimulus and support measures announced could extend the inflationary pressure."

While energy inflation has been slowing, yet remains high, food prices continue on an upward trajectory, making it likely that inflation is going to stay stick for some time.

Inflationary pressures have eased slightly on the industrial front too as indicated by the slowdown in producer price growth.

However, latest purchasing managers' survey results showed that both manufacturing and services remained in the contraction zone. Official figures for retail sales also were weak as high inflation and rising interest rates eat into households' purchasing power.

Soaring energy and food prices, rents and rising interest rates among others have badly squeezed households and businesses this year. Many are finding it hard to cope with the cost of living crisis, the most severe one seen in several decades.

Governments were forced to come up with support measures for households and businesses, especially to ease the burden of the energy price rise.

Several economists and observers have cautioned that the modest improvement in some economic indicators over the past month and now, is most likely short-lived and does not mean a reversal in overall trends.

Germany is widely expected to escape a contraction in the fourth quarter, but ifo institute said on Wednesday that the biggest euro area economy is set to experience a mild recession during next year.

With persistently high inflation, the ECB will hike interest rates further in the coming months, but those are likely to be somewhat weaker than recent ones, the Mannheim-based think tank added.