FRANKFURT - The European Central Bank is all but certain to raise interest rates again on Thursday and pencil in more hikes for the next few months, with the only open question being how big these will be.

The ECB has been increasing rates at a record pace to fight a sudden bout of high inflation in the euro zone - the byproduct of factors such as the aftermath of the COVID-19 pandemic and an energy crisis that followed Russia's invasion of Ukraine.

The central bank for the 20 countries that share the euro is seen raising its deposit rate by another half a percentage point to 2.5% on Thursday, in line with what it said in December.

That would take the rate the ECB pays on bank deposits to the highest level since November 2008, after a steady climb from a record low of -0.5% in July.

But ECB President Christine Lagarde is certain to face questions about smaller rises from next month, after the U.S. Federal Reserve slowed the pace of its own hikes on Wednesday and some data pointed to a bleaker outlook for the euro zone.

The Fed raised rates again and said more rate increases were needed but also acknowledged that it had turned a corner on inflation and disinflation was underway, comments that buoyed stocks.

Lagarde has pushed back so far on any suggestion that the ECB is relenting in its fight against inflation and investors generally see her reaffirming that line on Thursday, an expectation that pushed the euro sharply higher overnight.

"We suspect the ECB will reiterate its hawkish message in February, as there are still uncertainties regarding underlying inflationary pressures and a change of tone would undermine the ECB's credibility," said Annalisa Piazza, a fixed-income research analyst at MFS Investment Management.

In December, the ECB said rates would be increased "at a steady pace" until it was happy inflation was heading back down to its 2% target.

But that guidance is now proving a source of contention within the Governing Council, as headline inflation falls sharply, though underlying price growth is still inching up and becoming increasingly broad.

Policy hawks who favour higher rates, such as the Netherlands' Klaas Knot, Slovakia's Peter Kazimir and Slovenia's Bostjan Vasle, have explicitly called for further 50-basis-point hikes in both February and March.

But doves, such as Greece's Yannis Stournaras and Italian board member Fabio Panetta, have argued for smaller moves, or at least for the ECB to refrain from making commitments for March.

This tension may result in a compromise on the language, as happened in December, whereby the ECB makes the size of its next rate hike dependent on incoming data, analysts said.

"Probably emboldened by the resilience of the euro zone economy, the ECB is likely to look through the energy-driven decline in headline inflation and to focus squarely on underlying inflationary pressure," UniCredit said, expecting signals for a 50-basis-point move in March as well.

BNP Paribas meanwhile thought the ECB might take out the reference to a "steady pace" of rate hikes or offset it so that a 50-basis-point increase would be "not predetermined (but) still a possible outcome".


Recent economic data has painted a mixed picture.

Headline inflation has been in rapid decline since peaking at a record 10.6% in October but core prices, which exclude volatile items such as food and fuel, have been rising at a steady or accelerating pace.

The euro zone unexpectedly eked out growth in the final three months of 2022 but this was largely due to an exceptionally mild winter and a stellar performance by Ireland.

And an ECB survey showed banks were tightening access to credit by the most since the 2011 debt crisis - usually the harbinger of lower growth and slowing inflation.

Financial markets expect the ECB's deposit rate to peak at 3.5% by the summer, which would be the highest level since the turn of the century.

The ECB is also set to reveal how exactly it plans to reduce the multi-trillion euro stock of bonds on its balance sheet, unwinding some of the asset purchases it made to boost inflation during almost a decade when it was too low.

Barclays analysts estimate that 60 billion euros worth of maturing bonds the ECB will not replace between March and June will be split roughly evenly between government bonds and other debt, comprising corporate and covered bonds as well as asset-backed securities.

(Editing by Catherine Evans; Editing by Clarence Fernandez)