**As seen in Risk In The Week report 09/02/2022, subscribe at cablefxm.co.uk/reports
The Lagarde led ECB made history in July when the central bank decided to raise interest rates for the first time in 11 years. We have received many data points since then and expectations have shifted with risks seen to the upside on inflation and rates. Markets were surprised as the ECB delivered a 50bps hike, twice what the consensus had been expecting. Also, the much awaited ‘anti-fragmentation’ tool was affirmed by the board in an attempt to keep sovereign yield spread stable, however, the ECB would have to convey an emergency meeting on this matter only two days after the monetary policy announcement. The bank decided to drop its forward guidance and adopt a more flexible meeting by meeting approach to policy decisions, on this, they said they would continue to be data-dependent. By the time the presser was over, the market expected the policy rate to reach 2% in 2023. Today, overnight index swaps price in an additional 175bps of tightening from the ECB by year-end, the market sees rates above 2.0% by May. Hawkish bets on eurozone money markets follow an accelerating rate of inflation, the last read showed the core rate rising to 4.3% Y/ y and the headline printing at 8.9% for the month of July. Strategists at Citi said they would bet on 75bps rate hikes in both September and October meetings, they view a fast but potentially short tightening cycle as a baseline scenario since the case for rate hikes beyond 2022 remains very uncertain. Analysts at ING expect the ECB to be less ambitious and hike rates by only 50bps, however, they do not exclude risks of a 75bps move. Ahead, ING says it is difficult to see the ECB tightening policy after the Eurozone is hit by a winter recession. As the market has fully priced in a 75bps move next week, Danske Bank say there could be a decent steepening in curves if the central bank were to deliver only 50bps, they see the 5y and 10y tenors underperforming the most.
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