Both the ECB and the Bank of England will be raising interest rates this week, but the size of these hikes is still somewhat uncertain. Both central banks are in a tough spot – trying to bring down inflation, even as their economies slow – and it’s leading to acute policy trade-offs. Even after this week’s meetings, both central banks will need to hike more, before cutting later in 2023.
  • We think the ECB will hike rates by 0.50 percentage points at its meeting Thursday, bringing the key rate to 2%. It’s a closer call than it was a month ago, but the sharply slowing Eurozone economy now is likely to pull in the reins on the pace of tightening.
  • The ECB will seek to de-dramatise quantitative tightening by making it passive and minimising the signalling channel between rates and balance sheet policy.
  • However, it’s plausible that an increase in bond market stress, especially in peripheral government debt markets, would see the ECB end its QT in the not-so-distant future.
  • We expect the Bank of England to hike rates by 0.75 percentage points at its meeting Thursday. Recent speeches suggest Bank policymakers are very divided about the appropriate path of policy. But we think the persistence of underlying inflation will keep the majority in favour of a larger rate increase.

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