A new front has opened in her battle ECB against inflation, as negotiations are underway within the bank, with the amount of the interest rate increase being a compromise on how exactly the reduction of bonds in its portfolio will be carried out. And the most likely result of the new confrontation will be a softer rate hike than the ECB originally planned. At Thursday’s meeting, the bank is expected to announce a new interest rate hike as well as plans to cut $5 trillion in bonds. euros, which he bought in recent years as part of the eurozone support policy. With the reduction of these bonds, the impact of the bank’s transition to a restrictive monetary policy will be stronger. But much is at stake, as by cutting bonds from its portfolio, the ECB is already entering uncharted territory with an unknown market reaction.

The supporters of restrictive monetary policy, the ECB’s notorious “morons”, are eager to start a process of so-called “quantitative tightening” (QT), as the reduction of its portfolio is called, as opposed to the applied quantitative easing. while the bank was buying bonds. On the opposite end, as usual, are the bank’s so-called doves, those who support the growth of monetary policy, who now express fears about the risk of a recession due to a combination of higher interest rates and quantitative tightening. In this case, they intend to use their influence to achieve a softer rate hike. Thus, economists now agree that at Thursday’s meeting, the bank will start raising interest rates by half a percentage point, following two consecutive increases of 75 basis points, which were decided at the previous two meetings.

This will not be the first such compromise. In July, the ECB announced a larger-than-expected rate hike, introducing a new tool it plans to use to restore calm to over-indebted eurozone bond markets once expansionary monetary policy is lifted. But now it’s more serious. Inflation could slow down and the deposit rate is already at 1.5%, close to a level that could further damage an already fragile economy. And, of course, QT is causing concern and speculation in both the ECB and European markets, as no one knows the implications.

The most likely result of the new confrontation will be a softer rate hike than originally planned by the central bank.

Speaking to Bloomberg, Bridget Henseler, an analyst at DZ Bank in Frankfurt, predicts that “in exchange for a more lenient rate hike, ECB officials will stop reinvesting maturing bond gains.” Her assessments seem to be supported by statements by Gediminas Simkus and Mārtiņš Kazaks, the central bank governors of Lithuania and Latvia, and the ECB’s toughest hardliners. Both officials hinted that the interest rate hike would be smaller, as it would be in exchange for a reduction in bonds in the bank’s portfolio. Significantly, Mr. Kazaks said that if the range of instruments that the ECB will use is wider, “then, perhaps, the increase in interest rates can be limited.”

Meanwhile, Bank of France governor Villeroy de Gallo called for a 50 basis point hike, and ECB chief economist Philip Lane took the same stance, stressing recently that “a lot has already been done.” done,” and added that “at the moment, the starting point is different.” Economists are also forecasting another 50 bp of growth. in February, at which the key deposit rate will reach 2.5%, and, according to their estimates, the ECB will start selling bonds under QT during the first quarter of the year. How exactly this will be done is not yet clear. All we know is that the vast majority of ECB officials prefer not to reinvest profits from maturing bonds rather than continue selling bonds directly by the bank. In the end, President Christine Lagarde promised to take a “measured and planned” approach. However, where there is a lot of room for disagreement is the exact design of QT and, in particular, the timing and speed with which it will be implemented. Bundesbank chief Joachim Nagel is calling for a complete halt to any reinvestment of proceeds from bonds maturing by March, but the prevailing view is that caution and prudence are needed. Even the equally aggressive bullshit Klaas Knott, Governor of the Bank of the Netherlands, argues that the bank should “start shortly, but only with a partial suspension of reinvestment, so that it first sees how deep the water is before deciding on the pace at which portfolio will shrink. Much will depend on how the economy copes with the energy shortage in the dead of winter.