ECB ‘will likely stick to big hike’

European Central Bank policymakers are still leaning towards a half-percentage-point rate hike today, despite turmoil in the banking sector, as they expect inflation will remain too high in coming years, a source told Reuters.

Investors had begun to doubt the ECB’s commitment to another big rate hike this week after the collapse of Silicon Valley Bank (SVB) in the United States sent ripples through global financial markets.

But the source close to the Governing Council said the ECB was unlikely to ditch its plan to raise rates by 50 basis points on March 16 — announced at its last meeting and repeated several times by President Christine Lagarde and her colleagues — because that would damage its credibility.

The source added that formal proposals for the meeting have not yet been distributed but policymakers have seen the new quarterly projections.

The new inflation forecasts for the next two years will be lower than in December but still put price growth well above the central bank’s 2% target in 2024 and slightly above it in 2025. An ECB spokesperson declined to comment. Furthermore, forecasts for core inflation, which excludes food and energy prices, were set to be revised higher, emboldening calls for more rate hikes by policy ‘hawks’ on the ECB’s Governing Council, the source added.

Still, ‘dovish’ policymakers who have been preaching greater caution in raising borrowing costs and warning about the risk of financial instability felt vindicated by the recent market turbulence, the source said.

They were likely to push back against committing to further rate increases and say instead that any new move would depend on incoming data.