The European Central Bank is anticipated to begin the process of reducing its balance sheet as it intensifies its efforts to remove monetary stimulus and bring inflation back to target.
According to the Financial Times, several members of the ECB governing council, which is set to meet on Thursday (27 October) to agree on a new interest rate hike, also plan to discuss ways to start shrinking the €8.8trn balance sheet after eight years of heavy lending and bond buying.
The central bank could also signal that it is preparing to shrink the €5trn portfolio of bonds it has amassed over the past decade, the reports said.
The ECB last raised rates on 8 September to 1.25% in an unprecedented move, up 75 basis points, having previously hiked interest rates by 0.5 basis points from zero in July.
ECB raises rates by unprecedented 0.75%
Lale Akoner, senior market strategist at BNY Mellon Investment Management, said that she expects a front-loaded tightening by the ECB, with another 75 basis-point rate hike this week, taking their policy rate to 1.5%.
"We suspect the European economy is already in a recession due primarily to the deepening energy shock, as Europe is a large net energy importer, unlike the US, and gas dependency is significant. This puts the ECB in a bind as to the pace of its hiking cycle," she said.
"By bringing forward hikes at this week's meeting and again in December, the ECB are allowing room to pause early next year, when we will be able to see the longer-term impacts of the Russian oil and gas supply crisis more clearly."
ECB rate hike: 'The price to pay for crushing the inflation dragon'
Gabriele Foà, co-portfolio manager at Algebris Investments, said that following the meeting, markets will mostly focus on announcements regarding quantitative tightening.
"We think the ECB will refrain from any major announcement on the policy at this stage, though we recognise that the re-investment policy on current purchases may be twisted to signal a new direction on balance sheet policy," he said.
"The ECB may announce changes to the third Targeted Longer-Term Refinancing Operations programme."
