While the euro and the dollar are again equalizing, the European Central Bank’s interest rate decision is critical for the course of the euro. 

In Europe, attention was turned to the messages to be given by ECB President Christine Lagarde regarding the interest rate decision of the European Central Bank. The economists’ median expectation indicates that interest rates will increase by 75 basis points once again, despite the rising opposition of politicians, especially the new Italian leader Giorgia Meloni. 

It is priced to double the deposit rate to 1.5 percent in the money markets. The expectation that the ECB will increase interest rates at a high rate is based on an inflation level that reaches almost 10 percent and is five times higher than the medium-term target of the ECB. 

Although raising the deposit rate to 1.5 percent means reaching neutral levels according to some ECB members, hawk members, especially Bundesbank President Joachim Nagel, think that restrictive levels will be reached more quickly. 

According to economists, the rate of increase in interest rates will decrease to 50 basis points in December. The profit opportunity and quantitative tightening created by the interest rate hike will also be on the ECB’s plan. 

The sudden increase in interest rates created an opportunity for banks that provided cheap funding during the Kovid era to make a profit by parking their cash at the ECB. The ECB is expected to take a step against this situation. 

In addition, after the September meeting, ECB members started to discuss shrinking the balance sheet by approximately 5 trillion euros. 

A decision on quantitative tightening is not expected to be announced at the meeting. Economists expect the balance sheet shrinkage to begin in the third quarter of 2023.