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The consensus among analysts and market pricing is that the ECB will opt for a 25bps hike in the Deposit Rate to 3.25%. Policymakers have indicated that the options are between a 25bps and 50bps hike, with the aim of bringing inflation back to target. Considering the political nature of the Governing Council, a 25bps hike is expected to be the compromise between the hawks and doves.

At the previous meeting, the ECB went against market expectations and stuck with its February guidance of a 50bps increase. They justified this move by pointing out that inflation was projected to remain too high for too long. The Governing Council is no longer providing guidance on rate hikes, instead referring to "rate decisions" that will be data-dependent.In terms of recent economic developments, headline inflation in the Eurozone rose to 7.0% in April from 6.9% whilst the super-core reading fell to 5.6% from 5.7%. Growth in the region was modest, with the flash print for Q1 Q/Q GDP coming in at 0.1%. The Eurozone unemployment rate remains at a historic low of 6.6%. The ECB Bank Lending Survey showed that banks are tightening lending standards, while demand for credit from companies is falling.

Looking at recent communication, ECB President Lagarde has noted that the rate-hike push is starting to work, but there is still ground to cover on rates. Chief Economist Lane stated that the upcoming meeting will likely see another interest rate hike, with future hikes being data-dependent. Policymakers have expressed differing opinions on the need for additional rate hikes, with some suggesting a limited number and size.Markets are currently priced for the Deposit Rate to reach 3.65% in July, implying 25bps hikes in May and June with a 60% chance of a further 25bps increase in July. No changes are expected to QT with the decision on the balance sheet for Q3 expected to come at the June meeting.