As it fights persistent inflation, the European Central Bank will hike interest rates for the eighth time on Thursday.

Since July, the euro zone’s central bank has raised rates by 350 basis points to slow the price rise. However, policymakers must tighten again this month and after that, since inflation is still years away from 2%.

After three consecutive 50 basis point raises, a 25 basis point move to decrease the pace is anticipated. However, a larger increase is still possible near the conclusion of a historic tightening cycle.

Policymakers may reach a deal on future hike signals.

Conservative “hawks” on the Governing Council favor a larger rise.

They have said they could live with a lower advance if the ECB confirms that May is not the end of its raises, even if other peers, including the U.S. Federal Reserve, are nearing their interest rate peaks.

ECB President Christine Lagarde’s desired majority is another matter.

Given the right guidance, many hawks could live with a smaller move, but their dovish colleagues are likely to loudly dissent if the hike is bigger, leaving the ECB again speaking with many voices, a weakness for years.

A compromise might cease reinvestments of aging debt acquired under the ECB’s 3.2 trillion euro Asset Purchase Programme from July, reducing the bank’s bloated balance sheet even if inflation would be minor.

Most Reuters-polled analysts predicted a 25 basis point raise, while markets predicted 75% to 80%. Rates peaked at 3.75% in September.

On Wednesday, the U.S. Federal Reserve raised rates by 25 basis points and hinted at a likely ECB cut.
Even though dovish arguments are growing, economic fundamentals support both sides.

The eurozone economy barely increased last quarter, and loan numbers revealed the greatest reduction in credit demand in almost a decade, suggesting prior rate rises are starting to filter through the economy, supporting a smaller move.

If stretched severely, this loan decline might become a credit bottleneck, dragging on barely positive growth.

The ECB’s deposit rate of 3% already limits economic activity, and underlying inflation has stalled.

“From a risk management perspective, shifting to 25 bps would give the ECB the flexibility to deal with both upside and downside risks to growth and inflation,” said Davide Oneglia, TS Lombard. “So, a 25 bps raise is not always ‘dovish’. We still want a 3.75% ECB terminal rate.”

Most Reuters-polled analysts predicted a 25 basis point raise, while markets predicted 75% to 80%. Rates peaked at 3.75% in September.

On Wednesday, the U.S. Federal Reserve raised rates by 25 basis points and hinted at a likely ECB cut.
Even though dovish arguments are growing, economic fundamentals support both sides.

The eurozone economy barely increased last quarter, and loan numbers revealed the greatest reduction in credit demand in almost a decade, suggesting prior rate rises are starting to filter through the economy, supporting a smaller move.

If stretched severely, this loan decline might become a credit bottleneck, dragging on barely positive growth.

The ECB’s deposit rate of 3% already limits economic activity, and underlying inflation has stalled.

“From a risk management perspective, shifting to 25 bps would give the ECB the flexibility to deal with both upside and downside risks to growth and inflation,” said Davide Oneglia, TS Lombard. “So, a 25 bps raise is not always ‘dovish’. We still want a 3.75% ECB terminal rate.”