ABN AMRO: ECB to raise rates by 75 bps and set principles on reducing bond holdings

Recent comments by ECB officials have raised doubts about whether the ECB will really slow down the pace of interest rate hikes. Macro data since the ECB’s October meeting showed on the one hand that the eurozone economy showed resilience in the third quarter, but also confirmed that the eurozone economy cooled further in the final months of the year. Falling headline inflation may at least reduce the urgency to continue raising rates sharply.

In summary, we see a clear increased risk of a 75 basis point ECB rate hike. Following the rate hike, the ECB will likely set some general principles on how it plans to reduce its bond holdings. We expect the ECB to eventually reduce its reinvestment in bond purchases, but not sell bonds outright.