Hanging in the balance: Five questions for the ECB

Introduction

The European Central Bank (ECB) is holding its latest policy meeting today, and there are a number of key questions that investors will be looking for answers to. Here are five of the most important:

1. Will the ECB raise interest rates?

The ECB has kept interest rates at record lows for years, but there are growing expectations that it will start to raise them soon. This is because inflation in the eurozone has been rising, and the ECB is concerned that it could become entrenched if it doesn't take action. However, raising interest rates could also slow down economic growth, so the ECB will need to weigh the risks carefully.

2. How much will the ECB raise interest rates by?

If the ECB does decide to raise interest rates, the question will be by how much. Some economists are predicting a small increase of 0.25%, while others believe the ECB could go for a larger hike of 0.50%. The size of the increase will depend on the ECB's assessment of the risks to inflation and growth.

3. Will the ECB start to reduce its balance sheet?

The ECB has amassed a large balance sheet over the years as part of its quantitative easing program. This has helped to keep interest rates low, but it has also raised concerns about financial stability. The ECB is now considering whether to start to reduce its balance sheet, which would involve selling some of the bonds it holds. This would put upward pressure on interest rates, but it could also help to reduce the risk of a financial crisis.

4. What will the ECB say about the economic outlook?

The ECB will also release its latest economic projections today. These projections will provide investors with an insight into the ECB's view of the economic outlook for the eurozone. The ECB is likely to downgrade its growth forecasts, but it will be interesting to see how much it downgrades them by.

5. Will the ECB signal a change in its forward guidance?

The ECB has been providing forward guidance in recent months, indicating that it would keep interest rates at record lows for an extended period of time. However, the rising inflation has led to speculation that the ECB could change its forward guidance today. If the ECB does change its forward guidance, it would be a sign that it is preparing to raise interest rates sooner than previously expected.