All eyes on the ECB in the Eurozone, so what does the market expect?

While the euro and dollar are once again equal, the European Central Bank's interest rate decision is of critical importance for the course of the euro. In Europe, attention has turned to the European Central Bank's interest rate decision and the messages that ECB President Christine Lagarde will give. Economists' median expectation is that interest rates will be increased by 75 basis points once again, despite the rising opposition from politicians, especially the new Italian leader Giorgia Meloni. Money markets are also pricing in a doubling of the deposit rate to 1.5 percent. The expectation that the ECB will increase interest rates rapidly is based on an inflation level that has reached almost 10 percent and is 5 times higher than the ECB's medium-term target. Although some ECB members consider raising the deposit rate to 1.5 percent to mean reaching neutral levels, hawkish members, especially Bundesbank President Joachim Nagel, believe that restrictive levels should be reached more quickly. According to economists, the rate of interest rate increase will drop to 50 basis points in December. The ECB's agenda will also include the profit opportunities created by the interest rate hike for banks and quantitative tightening. The sudden increase in interest rates created an opportunity for banks that provided cheap funding during the Covid period to park their cash with the ECB and make a profit. The ECB is expected to take a step against this situation. In addition, after the September meeting, ECB members began discussing the process of reducing the approximately 5 trillion euro balance sheet. A decision on quantitative tightening is not expected to be announced at the meeting. Economists expect the balance sheet reduction to begin in the third quarter of 2023.