The European Central Bank may raise interest rates by 25 basis points or show "tougher intentions"

AohuiForeign Exchange News-On Thursday (September 14), investors stayed on the sidelines ahead of the results of the European Central Bank's (ECB) policy meeting later, while forecasting a roughly 65% chance of a 25 basis point rise in interest rates.

Money market bets on the central bank's tightening path have risen steadily since the September 6 unexpected acceleration of data from the Institute for Supply Management (ISM) services sector, with some ECB hawks saying markets may be underestimating the likelihood of longer-term rate hikes.

On Wednesday, the likelihood of tightening briefly rose to nearly 80 percent, while Reuters reported that the European Central Bank expects euro zone inflation to remain at 3 percent. In June, ECB staff predicted 3 percent inflation in 2024 and 2.2 percent in 2025.

Analysts said such revisions to inflation forecasts were unlikely to coincide with a pause in the tightening cycle.

"The ECB may prefer a final rate hike to increase credibility and keep the market guessing that more is to come, rather than allowing real yield gains to gain momentum," analysts at Citi said in a research note.

They also mentioned that the ECB could show "tougher intentions rather than simply a long-term move higher".

Several European Central Bank officials have recently said that interest rates must remain high for an extended period of time to contain sticky inflation.

Analysts at Metzler, the German investment bank, said in a note that it could be assumed that even the ECB council "won't know what the outcome of the discussion/vote will be until the last minute". After all, both sides have pressing enough reasons, even if the ECB's sole inflation mandate is always given greater weight. Analysts said they expected the ECB to leave its key interest rate unchanged. But the question does not appear to be whether the ECB will raise rates, but whether the accompanying wording will be the deciding factor in stimulating markets.

Slowing inflation and the closing of the window of opportunity are the main reasons why the ECB could raise interest rates for the last time today, UniCredit economists wrote in a report. While this will be a difficult decision, the downward trend in inflation remains too shallow for many members of the ECB's governing council. Moreover, the window of opportunity is likely to close after today as inflation begins to ease at an accelerated pace. Therefore, the ECB should raise interest rates by another 25 basis points.

It is worth noting that, according to Commerzbank, there will be no further interest rate moves by the ECB, and as a result, the deposit rate has peaked at 3.75%. The ECB admits that today's decision could be tough, as some hawks on the committee have so far supported a rate hike. The market sees a good chance that the ECB will cut rates again next year. Therefore, it may make sense for the ECB to raise rates again today and then signal at least one rate cut next year to support the economy. However, with (core) inflation still stubbornly above target, we do not expect the ECB to cut rates in 2024. Given the different views, it is difficult to tell how the euro will react today, and everything seems possible.