The ECB should raise the deposit rate to 4, 5 or even 6%

The ECB's next interest rate decision is due on 2 February. The decision in December was strongly disputed between those in favour of a 50bp rate move and those who would have preferred another 75bp move. In the end, it was 50bp, with a clear indication that several 50bp moves can be expected in 2023. So, it is clear that the ECB will raise policy rates by 50bp on both 2 February and in March. Extraordinary events that would justify a deviation from the forecast have not occurred.

The inflation rate has fallen recently, but at around 9% it is still well above the central bank's target range. A further decline is certain and a drop to around 5% is possible in the summer. On the other hand, core inflation is rising steadily and exceeded the 5% mark in December. This shows that inflation has become entrenched and that further efforts are needed to bring the inflation rate back into the central bank's target range.

Besides the question of what the central bank will do, there is of course always the question of what we would do if we were in the ECB's position.

Our main concern is the massive fiscal policy support in the euro area and its impact on future inflation developments. The Corona aid has significantly increased the assets of private households in particular. But the capitalisation of many companies is also better than before the crisis. The support payments to cope with the energy price explosion mean that these asset cushions will be maintained. In addition, there is the intention to counter the US government's infrastructure programme with a corresponding counterpart in the euro area.

This is building up inflationary potential, which the central bank should counterbalance as soon as possible in the form of even more significant interest rate hikes. Raising the deposit rate from the current 2% to 3% will not be sufficient. 4, 5 or even 6% should be the target, accompanied by a timely reduction in ECB's bond holdings.