The European Central Bank (ECB) will raise interest rates again on Thursday and will likely remove a major subsidy for commercial banks, taking another big step in tightening monetary policy to combat a historic rise in inflation.

Fearing that rapid price growth will take hold, the ECB has already raised rates at the fastest pace in its history, with no truce in sight as a decade-long withdrawal of stimulus could drag on. until next year and beyond.

The ECB will almost certainly raise its 0.75% deposit rate by 75 basis points – a cumulative increase of 2 percentage points over three meetings – signaling that it is not done yet, although the magnitude of subsequent moves remain the subject of debate.

However, in a potentially more important move, the bank is also likely to take the first steps to reduce its €8.8 trillion balance sheet, oversized by years of debt purchases and ultra-cheap loans to banks.

The rate decision will probably be the easiest part of Thursday’s meeting.

Unlike in September, no policymaker has been outspoken against the idea of a 75 basis point hike on Thursday, and markets have taken that move entirely for granted, suggesting easy unanimity, especially since the US Federal Reserve has also hinted at a similar hike.

However, ECB President Christine Lagarde is likely to offer only vague guidance, arguing that further hikes are needed, but incoming data and new economic projections for December will be decisive.

“We suspect it will drop hints that point to an increasing likelihood that rates will have to rise into tightening territory and a slower rate of hikes after today’s sharp rise,” UniCredit said in a note.

Although inflation is high and widening, the overall picture may be more balanced than in the past as spot energy prices are falling, the looming recession will dampen price pressure and there is no sign of a spiral. wage prices.

The ECB’s interest rate decision is due at 1315 GMT, followed by Lagarde’s press conference at 1345 GMT.

THE BATTLE OF THE SCALES

The real battle will probably center on how to reduce the ECB’s balance sheet.

The most pressing issue is the treatment of €2.1 trillion of ultra-cheap loans to commercial banks, which are causing both a regulatory and financial headache.

Having borrowed at zero or even negative rates, banks can now simply deposit this money with the ECB for a positive, risk-free return, which increases with each rise in deposit rates.

“We suspect that one element of the decision is political pressure so that banks are not seen as having too favorable terms,” BNP Paribas said.

The ECB would also be justified on monetary policy grounds to act, as abundant liquidity is keeping interest rates too low: money market rates remain slightly below the central bank’s deposit rate.

This is essentially preventing rate hikes from being fully transmitted to the real economy, so the ECB is likely to decide to change the terms of so-called Targeted Longer-Term Refinancing Operations, or TLTROs, to encourage banks to repay them early.

Although it is likely that the bank will decide to change the terms of the bank loans, it will be the details that are important, since only imperfect options are available.

The most controversial would be a simple change in terms, a move likely to be challenged in court.

“Changing the terms of the TLTRO could affect the ECB’s credibility and make banks reluctant to use TLTROs again in the future,” said Carsten Brzeski, an economist at ING.

The ECB could also create a tiering system where reserves equivalent to TLTRO funding lines would be remunerated at lower rates, while it could also set a lower rate applied to excess reserves.

An even more contentious debate on Thursday will be how to get rid of the 5 trillion euros of debt, mostly government bonds, bought by the ECB.