ECB officials weigh slowing pace of interest rate-hikes with half-point move

European Central Bank policymakers may slow down the pace of hikes in interest rates, with only a half percentage point increase next month, according to people with knowledge of the matter.

Initial discussions suggest a lack of momentum for another three-quarter point move at present, the people said, declining to be identified because ECB’s governing council deliberations are private. 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 per cent will come 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.

An ECB spokesman declined to comment.

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With four weeks to go before the ECB’s final decision of the year on December 15th, officials still have plenty of time to make up their minds. Against a backdrop of market expectations for a half-point hike, hawkish policymakers have not tried much to counter that view by insisting on a third consecutive increase of 75 basis points.

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 central bank president Joachim Nagel.

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

Bank of France chief Francois Villeroy de Galhau predicted on Wednesday that the ECB will probably hike to a “normalisation range of around 2 per cent” next month, remarks that might also point to 50 basis points.

The next inflation reading due on November 30th 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 said in an interview. He declined to express a view on the size of the next move.

The governing council’s most recent discussions were scheduled for November 9th. Weaker-than-expected US inflation data published the next day may have encouraged ECB officials, and some Federal Reserve counterparts have said it may now be time to moderate their own rate hiking.

Even so, at 10.7 per cent in the euro zone, inflation remains at a record in the history of the single currency. Mr Guindos warned that it will stay “elevated” through the first half of 2023. Meanwhile, price growth in the UK was a faster-than-expected 11.1 per cent in October.

The next governing council meeting will coincide with the publication of the November inflation reading on November 30th. A week later, policymakers begin a quiet period before their December decision. – Bloomberg