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European flags are seen in front of the European Central Bank (ECB) building, in Frankfurt, Germany, July 21, 2022. Price pressures are easing and the economy is slowing to a point that a recession may already be underway, making any further rate hikes increasingly unlikely. Meeting in Athens for the first time in over a decade, the Governing Council is expected to have an easy time deciding on rates. Others argue that growth prospects are deteriorating so quickly that the ECB would be better served with a "neutral" guidance, emphasizing data dependency. This suggests that any change in the scheme will be gradual, so the ECB can protect Italy as long as possible.

Persons: Wolfgang Rattay, Martin Wolburg, Wolburg, Frederik Ducrozet, reinvestments, Balazs Koranyi, Emelia Sithole Organizations: European Central Bank, REUTERS, ECB, Generali Investments, Wealth Management, Thomson Locations: Frankfurt, Germany, FRANKFURT, Athens, Italy

Because higher yields signal a rise in borrowing costs, the selloff has raised questions about the long-term sustainability of Italy's huge debt pile. Meloni has said she is not worried by the rise in yields, saying: "Italy is solid." Most of the sources said there is no hurry to end reinvestments or even to formally open this discussion on the policy-making Governing Council. Some argued that PEPP reinvestments should end before any talk of a rate cut, now expected by markets around mid-2024. Spreads of Italian 10-year bonds over their German counterparts are up roughly 30 basis points this month in their biggest jump since last December.

Persons: Wolfgang Rattay, Giorgia, Christine Lagarde, Meloni, PEPP, Balazs Koranyi, Catherine Evans Organizations: European Central Bank, ECB, REUTERS, Rights, Central Bank, Thomson Locations: Frankfurt, Germany, Italy

European Central Bank (ECB) President Christine Lagarde speaks to the media following the Governing Council's monetary policy meeting at the ECB headquarters in Frankfurt, Germany, July 27, 2023. Lagarde stigmatised the leak at the start of the two-day meeting, a criticism that was echoed by several colleagues. But as borrowing costs were pushed higher, more policymakers expressed reservations about further hikes, the sources said. Lagarde has spared no effort in trying to woo her colleagues. In return, she asked for governors to stop trashing policy decisions once taken, keep internal disputes out of the media and put their phones away while colleagues were speaking.

Persons: Christine Lagarde, Kai Pfaffenbach, Mario Draghi, Claudia Buch, Andrea Enria, Lagarde's, Lagarde, Weeks, Draghi, Francesco Canepa, Mike Harrison Organizations: European Central Bank, ECB, REUTERS, SANTIAGO DE, Central Bank, Reuters, Governing Council, Single, Thomson Locations: Frankfurt, Germany, FRANKFURT, SANTIAGO, SANTIAGO DE COMPOSTELA, Draghi

This will leave investors guessing whether another rate hike is coming or if July marks the end of the ECB's fastest-ever tightening spree. "The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction," the ECB added. While markets had fully priced in another rate hike just a few weeks ago, a growing number of investors are betting that Thursday's move will be the last. More tightening would however be consistent with comments from a host of policymakers, including ECB board member Isabel Schnabel, that raising rates too far would still be less costly than not lifting them high enough. This is a key reason why the balance of expectations has started to shift away from another rate hike, with economists increasingly focusing on how long rates will stay high.

Persons: Isabel Schnabel, Jerome Powell, Christine Lagarde, Catherine Evans Organizations: European Central Bank, ECB, U.S . Federal Reserve, Thomson Locations: FRANKFURT

That will leave investors guessing whether another rate hike is coming in September or if July marks the end of the ECB's fastest-ever tightening spree. While markets had fully priced in another rate hike just a few weeks ago, investors are now split, with many expecting July's move to be the last. "We see a 60% probability that the ECB will hike again by a final 25bp on 14 September," Berenberg's Salomon Fiedler said. "Softer data such as the drop in the Eurozone composite PMI indicate a rising chance that the central bank will stay put in September already." This is a key reason why the balance of expectations has started to shift away from another rate hike, with economists increasingly focusing on how long rates will stay high.

Persons: July's, Berenberg's Salomon Fiedler, Isabel Schnabel, Jerome Powell, Anatoli Annenkov, Christine Lagarde, Commerzbank's Marco Wagner, Catherine Evans Organizations: European Central Bank, ECB, PMI, U.S . Federal Reserve, Thomson Locations: FRANKFURT

"We are not pausing - that is very clear," ECB President Christine Lagarde told a press conference. NOT FED DEPENDENTShe also dismissed the notion that the ECB would have to pause if its U.S. counterpart did so, saying the ECB was "not Fed-dependent". The German 10-year yield , the euro zone benchmark, fell as much as 7 basis points to a one-month low of 2.18%. "In a nod to the hawks, the ECB hinted at 'future decisions' in the plural," Holger Schmieding at Berenberg said. Firms in the services sector especially have complained of labour shortages, suggesting that more wage pressures could come this summer.

But it made clear that further action was likely given mounting wage and price pressures. "We are not pausing - that is very clear," ECB President Christine Lagarde told a press conference. The ECB move, a slowdown after three consecutive 50 basis point increases, comes only days after euro zone banking data showed the biggest drop in loan demand in over a decade. That suggests previous rate rises are working their way through the economy and that ECB policies are now restricting growth. Reuters GraphicsPolicymakers had been split in the run up to Thursday's meeting between a 25 basis point and a 50 basis point rise, but markets and economists had overwhelmingly bet on the smaller increase after soft data in recent weeks and similar moderation by other big central banks, most recently the Fed on Wednesday.

A 25 basis point move, a slowdown after three straight 50 basis point hikes, appears the most likely outcome, although the bigger increase is still a possibility at what is almost certainly not the end of a historic tightening cycle. Markets see an 80% chance of a 25 basis point move while the vast majority of economists polled by Reuters were also betting on the smaller hike. Supporting a possible ECB downshift, the U.S. Federal Reserve lifted rates by 25 basis points on Wednesday and signalled it may pause further increases. At 3%, the ECB's deposit rate is already restricting economic activity, and underlying inflation has also stopped rising - at least for the time being. The ECB will announce its policy decision at 1215 GMT and Lagarde will hold a press conference at 1245 GMT.

Summary ECB signalled 50 bps hikeMarkets doubt its resolve and price 25 bpsFinancial turmoil seen derailing rate hike plansInflation to stay above target through 2025FRANKFURT, March 16 (Reuters) - European Central Bank policymakers are meeting on Thursday amidst turmoil in financial markets that could force it to divert from plans for another hefty interest rate hike even though inflation remains too high. Now the ECB must reconcile its inflation-fighting credibility with the need to maintain financial stability in the face of overwhelmingly imported turmoil. Complicating its task, the central bank for the 20 countries that use the euro currency has essentially already committed to a 50 basis point increase on Thursday. Money market pricing suggests that investors now see just a 30% chance of a 50 basis point increase, down from as high as 90% early on Wednesday. The peak ECB rate, also known as terminal rate, is now seen at only around 3.25%, down from 4.1% last week, an exceptional reversal in market pricing.

But the rate decision is likely to be the easy part of Thursday's meeting. The ECB's rate decision is due out at 1315 GMT, followed by Lagarde's news conference at 1345 GMT. Having borrowed at zero or even negative rates, banks can now simply park this cash back at the ECB for a positive, risk-free return, which rises with each deposit rate hike. The ECB would also be justified on monetary policy grounds to act, as abundant liquidity is keeping interest rates too low - money market rates are still slightly below the central bank's deposit rate. The bank is likely to decide to change the bank loan terms, but the devil will be in the detail as only imperfect options are available to it.

A new 100-euro banknote is presented at the ECB headquarters in Frankfurt, Germany, September 17, 2018. Register now for FREE unlimited access to Reuters.com RegisterSenior staff presented the model to policymakers at a retreat in Cyprus last week. MODELS, DOUBTSThe ECB has raised its deposit rate from -0.5% to 0.75% in less than two months, its fastest pace on record, and another large hike is slated for Oct. 27. And staff said this rate peak would be even lower if the ECB hoovered up some excess liquidity from the financial system - a reduction in its balance sheet often called quantitative tightening - the sources added. Policymakers' key objection was that staff models have fared poorly in recent years so there was little confidence in an indicator that was so far below current market pricing, the sources said.

Policymakers agreed that markets were tense now so there was no sense in testing investors with a premature reinvestment plan. Policy hawks, normally advocates of tighter policy, also appeared to be on board with this plan, the sources said, as they are prioritising rate hikes and saw the balance sheet question as a secondary issue. Some fear that if a reduction in the balance sheet started soon, that would serve as an argument for a slowdown in rate hikes. The sources added that the discussion did not impact the ECB's 1.7 trillion euro Pandemic Emergency Purchase Programme. Reinvestments in this programme are set to run through 2024 and policymakers are not keen at all to make a change.

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