By Dhara Ranasinghe, Tommy Wilkes and Saikat Chatterjee

LONDON, (Reuters) – The European Central Bank seems certain to announce that the years of bond-buying stimulation are now over. This will mean that there is no need for high inflation and that interest rates are likely to rise.

More clarity is needed from the markets about where we are going and how policy will be adjusted to keep up with rising prices.

Moritz Kraemer, chief economist at LBBW, stated that this could be Christine Lagarde’s moment of “whatever it takes” because there is doubt about whether or not the ECB can hike as aggressively.

These are the five most important questions to ask markets.

1/ How will the ECB respond to Thursday’s events?

Nearly certain, the ECB is going to announce that it will cease bond buying mid-year. It will then open the door for a rate rise in July.

Lagarde stated that the -0.50% Deposit Rate should be zero or slightly above by September end. This would imply a minimum 50 basis point (bps) increase from current levels.

It is also possible that policymakers will restate their commitments to continuing to reinvest proceeds from maturing bonds back in the market to support weaker countries of the euro area.

Graphic: ECB looks set end asset purchases around mid-year – https://fingfx.thomsonreuters.com/gfx/mkt/zjvqkgakmvx/ECBpathJune.PNG

2/ Could a July rate rise be possible?

Markets and economists expect a 25-bps rate increase in July, but there has been increased speculation due to record levels of eurozone inflation in May.

According to the Slovak, Austrian, Latvian, and Dutch central bank governors, a 50-bps increase should be possible.

Lagarde’s remarks before the inflation numbers were released indicated a 25-bps increase, but left open the possibility of bigger movements in the coming months.

Lagarde is likely to press for a rate rise, with euro-area inflation at 8.1%, which is nearly four times that of the ECB’s 2% target.

Graphic: Markets bet ECB will hike rates by over 100 bps in 2022 – https://graphics.reuters.com/EUROPE-MARKETS/gkplgzjrqvb/chart.png

3/ What’s the most important thing about neutral rates?

Lagarde, however, has suggested further rate rises to the neutral level or above. Therefore, a perception of neutrality by the ECB would suggest how high it expects rates will go.

The neutral rate, an invisible rate that brings the economy’s output to its potential, is not stimulative and it is also non-restrictive.

The ECB is estimating that it will be anywhere from 1% to 2%. This suggests that rates could rise well beyond 2023. Fabio Panetta from the ECB believes that normalization of policy should not lead to rates returning to neutral.

Graphic: What is the neutral rate of the ECB? – https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrnjwzpm/ECBneutral.PNG

4. What is the impact of a slowing economy on rate increases?

The ECB has a smaller window to normalize rates prior to growth slowing. This could mean that it will have to decide between fighting inflation and supporting growth. But, ultimately, the ECB’s mandate is price stability.

Global economic problems include high inflation that is pushing down consumption and the ongoing war in Ukraine. On Thursday, the latest ECB forecasts could show sharply revised downwards in growth estimates and revisions up to inflation estimates.

Recent Reuters polls show that 30% of economists predict a recession over the coming year.

Philip Lane, chief economist at the ECB, warns that rate movements beyond September will be affected by inflation and the effect of the Ukraine conflict.

Graphic: ECB chartpack – US and europe cesis – https://fingfx.thomsonreuters.com/gfx/mkt/znvneomedpl/ECB%20chartpack%20-%20US%20and%20europe%20cesis.JPG

5/ Are the ECB concerned about a weakening euro?

Recent commentary indicates that the currency may be back on the ECB’s list of concerns. Francois Villeroy de Galhau, ECB policymaker, said that a weaker euro might make it difficult to control inflation toward its target.

However, publically the ECB seems to be sticking to its policy that monitors exchange rates but not to target them.

The dollar is up 6% this year against the euro, but the decline has been driven by Federal Reserve tightening. The euro has fallen 1.6% on a trade-weighted scale.

Graphic: ECB chartpack – euro and inflation – https://fingfx.thomsonreuters.com/gfx/mkt/zdpxowgylvx/ECB%20chartpack%20-%20euro%20and%20inflation.JPG