The European Central Bank is preparing to signal a rate hike in July as inflation rises

The European Central Bank is expected to confirm on Thursday its intention to raise interest rates next month, as rate-setters gather in Amsterdam for their first policy meeting outside Frankfurt since the onset of the coronavirus pandemic.

While inflation in the 19-country eurozone Hit another record in MayThe rate hike will only happen in July as the European Central Bank first needs to formally end its net asset purchases, according to its forward guidance.

The main question is how fierce the shift will be over the coming months – some analysts have shifted their estimates for a larger increase in September at the latest.

“A handful of board members are already open to a 50 basis point increase,” Mark Wall, chief economist at Deutsche Bank, said in a research note.

“We believe the ECB continues to play down inflation and expect support for a 50bp hike to increase as the summer progresses.”

The European Central Bank will also publish new staff forecasts for growth and inflation this week – and market participants are likely to keep a close eye on inflation data for 2024 as this constitutes the ECB’s medium-term target rate.

The European Central Bank is also expected to cut its growth forecast and revise its inflation forecast upwards, with the 2024 inflation figure likely to reach 2%, the ECB’s medium-term target.

Consistently high inflation is a major concern of policy makers on the European Central Bank’s Governing Council.

“Inflation is not only very high, but also very broad,” Francois Villeroy de Gallo, governor of the French central bank, said last week at a conference in Paris. “This requires the normalization of monetary policy – I say normalization, not tightening.”

While inflation, and fighting it, are of course the primary task of the ECB, the topic of retail risk is likely to be addressed this week as well.

Bond markets have already responded to the end of asset purchases and reassessed the various risks associated with different Eurozone countries.

As a result, the spread between German and Italian bonds has widened. The 10-year spread was above 200 basis points on Monday, compared to less than 140 basis points at the start of the year

“Fragmentation makes life complicated for the ECB. This does not mean that these considerations will invalidate everything that the inflation picture dictates regarding policy tightening,” Dirk Schumacher, ECB Observer at Natixis, said in a research note.

“But it is nonetheless an important implicit argument for gradualism,” he added.