The European Central Bank has announced that it will remain on track to raise interest rates. But it is not clear how long

Christine Lagarde, President of the European Central Bank (ECB).

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European Central Bank President Christine Lagarde has repeatedly used the phrase “on course” when referring to future interest rate decisions, but some market watchers doubt the bank will maintain its hawkish stance for much longer.

The European Central Bank went into contraction mode last year with four interest rate hikes in an effort to control high inflation in the Eurozone. These decisions raised the main deposit rate from -0.5% to 2%.

The latest data showed headline inflation falling for two consecutive months, but still well above the ECB’s 2 percent target, hence several comments from ECB officials about how rates may need to be raised, including Lagarde. “We remain on our path. Ensuring the timely return of inflation.

But ECB watchers ask: for how long?

“The European Central Bank’s moves are more uncertain after March, with a number of hawkish governing council members signaling more hikes in the second quarter,” Francesco Maria De Bella, fixed income strategist at UniCredit, told CNBC via email. .

He added: “The size of this rate hike will depend on the inflation outlook. The lower price pressure will likely allow the European Central Bank to raise rates by 25 basis points instead of 50 in May and June.”

Fabio Panetta, a member of the European Central Bank’s executive board, reportedly said earlier this week that the central bank should not pre-commit to changing specific rates beyond the March meeting.

Markets have priced in 50 basis points for the next two policy meetings, one next week and the other in March.

David Onglia, director of TS Lombard, said in an interview: “Panta’s speech suggests that the ECB doves are regrouping, but the hawks are still firmly in charge of at least the next two meetings, which is the main case scenario. “We have two 50-point base increases.” Email to CNBC

The European Central Bank, which has served as the region’s central bank since 1991, has historically been more supportive after years of declining inflation. But the energy crisis, tough supply chain issues, among other bottlenecks, have pushed up prices across the bloc and led to a new tone from the central bank.

A Reuters poll released earlier this week showed markets expected the European Central Bank to hold off on raising interest rates in the second quarter after the deposit rate reached 3.25 percent.

“It’s not clear how far the ECB can really go after March,” Unglia said. Federal Reserve.”

Traders are beginning to consider whether the Federal Reserve may end its tightening cycle in the coming sessions after weaker-than-expected data last week.

Therefore, if the U.S. enters a deeper than expected recession and/or the Fed cuts interest rates sharply in response to any rate cuts, [the] He said that the interest rate hike by the European Central Bank could be stopped sooner.

However, economic data in the Eurozone appears to be surprisingly on the upswing. The index figures of the flash composite purchasing index of the Eurozone showed positive growth on Tuesday.

The ECB's Centeno says all forecasts point to growth picking up in the second half of 2023.

That makes it less likely that the European Central Bank will be forced to end or even reverse its hawkish tone, but analysts don’t think the central bank will need to continue the bullish trend for much longer.

Capital Economics’ Andrew Cunningham also told CNBC that he expects another 50 basis points increase in February and March, followed by 25 basis points in May and June.

He added: “After that, we see that the policy rate will remain unchanged until the second half of 2024.

One aspect to consider is how inflation may moderate in the coming months as energy costs continue to fall.

“The language will be hawkish, stressing the need to get on with it and ‘stay the course,'” Cunningham said, pending what the ECB will announce next week, without specifying the amounts and dates of rate hikes.

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