ECB expected to hike interest rates by 0.75%

Balazs Koranyi, Reuters

The European Central Bank will raise interest rates again on Thursday and likely reel in a key subsidy to commercial banks, taking another huge step in tightening policy to fight off a historic surge in inflation.

Fearing that rapid price growth is becoming entrenched, the ECB has already raised rates at the fastest pace on record, and there is little let-up in sight as unwinding a decade worth of stimulus could take it well into next year and beyond.

The ECB is almost certain to raise its 0.75 per cent deposit rate by 75 basis points – for a cumulative 2 percentage-point increase in three meetings – and signal that it is not yet done, even if the size of subsequent moves remains open to debate.

Euro zone inflation is now running at 10 per cent, ahead of the ECB target rate of 2 per cent. Inflation in Ireland in September was 8.6 per cent.

There are approximately 400,000 households in Ireland with tracker and variable rate mortgages who will be most exposed to any rate rise.

In a potentially more important decision, the bank is also likely to take the first steps in reducing its €8.8 trillion balance sheet, bloated by years of debt purchases and ultra cheap loans extended to banks.

"The ECB is still in catch-up mode," BNP Paribas said. "We think there is now a comfortable majority for taking rates into restrictive territory."

But the rate decision is likely to be the easy part of Thursday's meeting.

Unlike in September, no policymaker has openly opposed the idea of a 75 basis-point hike on Thursday, and markets have fully priced in such a move, suggesting an easy unanimity, especially since the US Federal Reserve has also hinted at a similar increase.

Signalling that future moves will be more difficult, ECB President Christine Lagarde is likely to provide only vague guidance, arguing that more hikes are needed but incoming data and new economic projections in December will be key.

While inflation is high and underlying price growth is broadening, the overall picture may be more balanced than in the past as energy prices are falling, a looming recession will dampen price pressure, and there are no signs of a wage-price spiral.

The ECB's rate decision is due out at 1.15pm, followed by Lagarde's news conference at 1.45pm.