by Dhara Ranasinghe and Stefano Rebaudo

LONDON (Reuters) – Financial markets are expecting the European Central Bank (ECB) to hike interest rates for the seventh time in a row on Thursday as inflation in the euro zone remains too high.

With the easing of fears for the banking sector, the “hawks” of the institution could demand a significant rate hike. The inflation and bank credit figures expected on Tuesday could change the debate.

“The big question is whether the rate hike will be 25 or 50 basis points,” said Gareth Hill, fund manager at Royal London Asset Management. “All in all, at this point, I’m leaning more towards 25.”

For investors, Thursday’s meeting raises five key questions:

1/ How much will the ECB raise its rates?

Economists polled by Reuters expect a quarter-point increase, which would take the deposit rate to 3.25%. Sources have suggested ECB officials are converging on such a move, although other options remain on the table.

ECB executive board member Isabel Schnabel said in an interview with Politico that a 50 basis point hike could not be ruled out, while Banque de France governor François Villeroy de Galhau said that additional rate hikes may be necessary but limited, including “in size”.

The consumer price index and access to credit data in April, which will be released two days before the ECB meeting, could be decisive.

2/ When will the ECB stop monetary tightening?

Not immediately. Most analysts expect the ECB to make at least one more rate hike beyond May, although the US Federal Reserve looks set to take a break.

According to market expectations, the ECB’s terminal deposit rate could be around 3.6% this year. National Bank of Belgium Governor Pierre Wunsch said he would not be surprised to see the rate rise to 4%.

For Francis Yared, at Deutsche Bank, it is possible that the deposit rate exceeds 4%, given that underlying inflation and wages are rising faster in Europe than in the United States and that the budgetary policy of the euro zone has more opportunities to be expansionary.

3/ How rigid is core inflation?

Tuesday’s release of the first inflation estimate for April should show price inflation continuing to ease from the 2022 record. But the slowdown in the underlying measure is more erratic.

Price growth in services suggests that core inflation and wage pressures remain elevated, complicating the ECB’s efforts to control price developments.

April’s composite PMI, considered a good indicator of overall economic health, hit an 11-month high of 54.4 in April.

4/ What about salary pressures?

Labor markets are tight and workers are demanding wage increases to cope with rising prices.

German public sector employees have won a gradual 5.5% increase in pay for some 2.5 million workers from March 2024.

“Tight labor markets strengthen the bargaining power of workers and unions,” said Patrick Saner, head of macro strategy at Swiss Re. “Even if we consider a wage-price spiral like in the 1970s is unlikely, recent developments in the labor market must certainly worry the ECB because they maintain this risk”

5/ What is the impact of banking turbulence on financing conditions?

It may be too early to assess the full impact of the March banking crisis on financing conditions, but Tuesday’s data on companies’ access to credit should provide some answers. Analysts believe that the turmoil in the sector, which sent the European banking index down 14% last month, has further tightened the conditions for obtaining loans. “Following developments in the US and Swiss banking systems, we have cut our terminal deposit rate forecast by 25 basis points to 3.75%. We expect banks’ lending offices to become more risk averse “said Silvia Ardagna, economist at Barclays.

She believes the likelihood of a 50 basis point rate hike in May is “very low” given moderating economic growth and inflation.

(Dhara Ranasinghe in London and Stefano Rebaudo in Milan; with Yoruk Bahceli in Amsterdam; graphs Sumanta Sen, Vincent Flasseur, Kripa Jayaram, Laetitia Volga, edited by)

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