The short answer is a 50bp hike thereby bringing the deposit rate to 2.00%. The tightening of the policy stance having been delivered, plus the slight decrease in inflation in November should encourage the ECB to reduce speed of hiking. Yet, there is probably another hike of 50bp to expected early next year. In fact, the inflation forecast of 2023 is not slightly higher than previously and a normalization of inflation in the Euro area is to be expected only in 2025. The drag for inflation to normalize earlier is because wage growth is still expected to come, in several sequences as the labor market is relatively tight this time round in the Euro area.
The other big topic of the meeting will concern Quantitative Tightening following Lagarde’s pledge to come up with the “key principles” for reducing the bond holdings of the Asset Purchase Programme. With the ECB being intent on operating in a predictable, and measured way, active sales are a very unlikely option, and the key question is about how reinvestments will be phased out. The ECB could either decide to fully stop reinvestments from the start of the process, or to cap the proceeds from maturing securities that will not be reinvested (for the whole of 2023, APP redemptions should be in a EUR250-EUR350bn range). At this point of time, the ECB will not tie its own hands to any particular time schedule and is likely to start towards the end of the 1st half 2023 the programme. Let us see the outcome!