ECB weighs slower pace of rate hikes with potential half point hike next month

Mounting recession risks suggest a lack of momentum for another 75 basis-point move at present, sources said

Barring another surprise surge in inflation, the consensus might well favour a less aggressive step in raising interest rates, sources said.

European Central Bank policy makers may slow down interest-rate hiking, with only a half point increase next month, according to people with knowledge of the matter.

Initial discussions suggest a lack of momentum for another 75 basis-point move at present, the sources said. Barring another surprise surge in inflation, the consensus might well favour the less aggressive step, they said.

Among reasons cited are mounting recession risks, the possibility that consumer-price pressures will weaken, and the prospect that a half-point move in the deposit rate to 2% will reach close to a so-called neutral level that no longer stimulates the economy. The need to bargain over a start to balance-sheet reduction was also cited.

With four weeks to go before the ECB’s final decision of the year on December 15, officials still have plenty of time to make up their minds. 

75 basis points hike

Against a backdrop of market expectations for a half-point hike, hawkish policy makers haven’t tried much to counter that view by insisting on a third consecutive increase of 75 basis points.

“The Governing Council’s reticence to deliver another 75 basis point hike likely reflects a shift in the balance of risks, said Jamie Rush, chief European economist at Bloomberg Economics. 

"Our view is that a 50 basis point hike is likely in December, we also see borrowing costs topping out lower than markets expect,” he said. 

Austrian central bank governor Robert Holzmann — previously a cheerleader for aggression — hasn’t talked much about the size of the next increase, and neither has German Bundesbank president Joachim Nagel.

Their Estonian and Latvian colleagues, in a region suffering the eurozone’s most rampant inflation, have both cited 50 and 75 basis points as possibilities without yet expressing a preference.

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Bank of France chief Francois Villeroy de Galhau predicted earlier this week that the ECB will probably hike to a “normalisation range” of about 2% next month, remarks that might also point to 50 basis points.

The next inflation reading due November 30 will be “relevant” for the December decision, both as an indicator of price pressures and as a number to feed into quarterly forecasts, ECB vice president Luis de Guindos has suggested. He declined to express a view on the size of the next move.

Weaker-than-expected US inflation data may have encouraged ECB officials, and some US Federal Reserve counterparts have said it may now be time to moderate their own rate hiking. 

• Bloomberg