Frederik Ducrozet, Head of Macroeconomic Research Pictet Wealth Management.

The ECB is widely expected to hike policy rates by 75bp at its 27 October meeting and to commit to additional tightening in the next few months. We don’t expect much clarity on what it considers the ‘neutral rate’, but a growing consensus seems to be in favour of having the deposit rate at 2% by the end of the year (implying a 50bp hike in December), with a reassessment of the economic and inflation outlook in early 2023.

A special focus of attention this week will turn to measures limiting the attractiveness of TLTROs. We expect the ECB to introduce a TLTRO-based tiering system to reduce the gains for banks benefitting from cheap TLTRO loans (the average rate on which is below the ECB’s deposit rate) and redepositing excess reserves at the ECB (at the deposit rate). This system will incentivise banks to repay the share of TLTRO not used for regular funding before June 2023.

A broad-based reverse tiering system based on all banks’ excess reserves may create risks for the transmission of monetary policy to euro area money-market rates. Retroactive changes to TLTRO terms would raise legal risks and threaten the credibility of an instrument that could be needed again in the future.

The ECB will likely confirm that Quantitative Tightening (QT) will start in 2023, once policy rates are normalised. Crucially, QT will be a passive, gradual process.