"The instability has raised questions if the ECB will go ahead and raise rates by 50 bps as originally planned tomorrow," said Societe Generale analyst Kenneth Broux.
While rapidly rising interest rates across major economies have raised concern about potential pressure points, many analysts still expected a large ECB hike given high inflation.
"The risk that they do 25 bps (or nothing) is not zero but it is low, as it would send a terrible signal to the market," said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.
"Rather, the ECB might communicate on the support measures and backstop facilities they could put in place in order to make sure that banks have sufficient access to liquidity at any time."
As unease spread, the euro slid 1.8% against the dollar, its biggest one-day drop since the height of the COVID-induced market turmoil of March 2020 . Markets now priced euro zone rates would peak at around 3% this year, down from 4% last week. Germany's two-year government bond yield, sensitive to interest rate expectations, plunged 52 basis points at 2.42% , and the gap between Italian and German government bond yields moved back towards 200 bps .
TOOLKIT Analysts also said that banking fears spreading to Europe through Credit Suisse could prompt the ECB to announce a new liquidity backstop.
Were the ECB to announce a facility, Danske Bank chief analyst Piet Christiansen, said it could be a one-year liquidity operation acting as a backstop at the average deposit rate, compared to current weekly and three-month operations at the more punitive main refinancing operations rate.
Pictet's Ducrozet said the ECB could also ease collateral rules for banks, though not as much as the Federal Reserve. Eventually providing new, ad-hoc loans to banks may be more effective, he added. "Between now and tomorrow a lot can change so Lagarde can make the reference that they (the ECB) have the tools available to use if they need to," said Marchel Alexandrovich, European economist at Saltmarsh Economics. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ The race to raise rates ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Joice Alves and Alun John in London, and Yoruk Bahceli in Amsterdam, Writing by Dhara Ranasinghe; Editing by Toby Chopra and Jon Boyle)
