Key issues in the run-up to the ECB meeting

The European Central Bank (ECB) officials are meeting on Thursday, October 27. The regulator is expected to continue its interest rate hikes. These forecasts are made based on the higher inflation in the Eurozone. Meanwhile, experts predict monetary tightening despite deteriorating economic prospects.

Currently, the risk of recession is unlikely to come to the forefront. However, markets are still expecting signs of a slowdown in rate hikes.

The key questions ahead of the ECB meeting are:

1) What are the ECB's actions this week?

As a Reuters poll claims, economists are predicting a 75-basis-point rate hike, reaching 1.5%. Earlier, the regulator's representatives have already advocated for a significant rate rise, with a preference to the 0.75% hike. 

Investors are also looking for clarification from ECB Chair Christine Lagarde on its further actions related to avoiding recession and fighting high inflation. Therefore, monetary tightening is predicted.

2) Are there signs of a peak in inflation?

The economists believe it is too early to talk about the inflation peaking. However, there is a growing probability of its occurrence. The inflation has already reached 10%. These rates haven’t been seen across Europe in over 70 years. 

Another issue is the broad nature of inflation. In the event that countries' fundamentals begin to decline, underlying price growth continues to accelerate. 

That is why inflation peaking is crucial for the Eurozone economy. By crossing this threshold, the authorities would decide whether there is a need to raise interest rates above the neutral level of 1.5%-2%, i.e. when economic growth is neither slowing down nor stimulating. 

3) Is quantitative tapering (QT) going to be resumed?

Not just yet. The ECB would provide detailed information on its course in the coming months. 

The next issue on the regulator's agenda is also reducing bonds worth more than 5 trillion euros on the ECB balance sheet. These actions are going to take place within the framework of quantitative tapering. 

German central bank (Bundesbank) governor Joachim Nagel, along with Dutch bank governor Klaas Knot noted that QT is necessary as part of a broader inflation control in Europe. 

4) Is the ECB going to continue bailing out Eurozone banks?

The regulator is still lending funds to Eurozone banks at ultra-low and, in some cases, even negative rates. Thus, 2.1 trillion euros were allocated to stimulate national economies. 

But interest rate hikes have facilitated rapid repayment of debts, allowing banks to make risk-free profits. Politicians aren't thrilled with the situation.

The rules for lending to banking institutions are expected to undergo changes. This is likely to reduce their possible profits by tens of billions of euros.

5) How worried about the prospect of financial instability is the ECB?

A sharp increase in interest rates by the major Eurozone central banks, along with a fall in British bonds, has reinforced investor fears of financial instability.

According to experts at the International Monetary Fund (IMF), the countries' financial stability is at risk. Christine Lagarde said markets were positive about the economic outlook, rising correction risks.