European Central Bank could unleash a jumbo rate hike as the economy slides toward recession

With inflation in the euro zone projected to rise to at least 10% in the coming months, a “jumbo” rate hike of 75 basis points on is certainly a possibility.

The rising cost of living is expected to lead to a series of rate hikes by the European Central Bank.

The tone for the policy meeting this week was set by Isabel Schnabel. With inflation in the euro zone projected to rise to at least 10% in the coming months and the risk of consumer prices rocketing higher, a "jumbo" rate hike of 75 basis points on Thursday is definitely a possibility.

Holger Schmieding, Berenberg's Chief Economist, said in a research note that a 75bp move could make sense.

It could still cause problems in the bond markets.

The recent halt of gas deliveries to Europe via the Nord Stream 1 pipeline has pushed stocks lower and increased the risk of a recession in Europe. The government in Rome has to pay more to borrow due to high yields in Italy.

Inflation in the euro zone hit 9.7% in August and is expected to reach double-digits in the coming months. The risk of a recession looms large over the region's economy as consumers feel the pain and scale back their consumption, and companies struggle with high energy prices.

Dirk Schumacher with Natixis said in a research note to clients that there are limits to how much the private sector can be protected from income shocks.

The drop in consumer confidence to a record low over the last months indicates that households are aware of these limits. Evidence is growing that companies in the energy intensive sector are cutting production.

The core mandate of the bank is to keep inflation expectations anchored.

According to Mark Wall, the hiking cycle will be less sensitive to recession than we thought.

He said that the terminal rate had been raised to 2.5%. The benchmark rate of the European Central Bank is zero.

The neutral rate is believed to be between 1% and 2% and with inflation risk rising, the Governing Council of the European Central Bank may need to consider raising rates.

Quantitative tightening is the technical term for shrinking the central bank's balance sheet. The sale of assets hasn't been discussed by the European Central Bank.

There is a threat to the credibility of the European Central Bank and we wonder why quantitative tightening is not discussed.