🏦🇪🇺ECB Desk Commentary

UBS:

An eventful day in EGBs both on the policy and politics front. The BTP-Bund spread kicked off 24bp wider at the open in anticipation of Draghi's formal resignation this morning following the collapse of the government yesterday after the close. At the time of writing Mattarella - as widely expected - dissolved the parliament and the date of the elections may be set (most likely late September or early October).

The 50bp hike triggered a selloff in Bund, that however recovered out of the press conference and revisited the highs of the day as curves flattened across the board as future cuts get priced in in response to the frontloading of the hiking cycle. The BTP-Bund spread at first tightened on the unlimited nature of the transmission protection tool but then widened back up to 24Bbp intraday, which was more a result of the Bund rally rather than 1K selling off.

As a matter of fact, IKs were left relatively unperturbed by the ECB today: the new tool struck was apparently neither good nor bad as no upfront limit proved bullish while its backstop design, fairly strict conditionality and perhaps slow activation mechanism might have disappointed. It was puzzling to see no explanation of how sterilization would be achieved - the fervent speculation on the topic remains unanswered for the moment being. The focus on securities with residual maturity between one and ten years (similar to the SMP) undid notable flattening in the BTP curve: ahead of the press conference 10s30s was down as much as 16bp following substantial buying flows in 30y BTPs, but closed only lbp flatter on the day.

Wells Fargo:

Our view remains that today's hike will be followed up by another 50 bps Deposit Rate increase at the September meeting. In addition, while inflation remains elevated and until Eurozone economic growth slows in a much more meaningful manner, we also see a steady series of rate increases as more likely than not. In that context, we also forecast a 25 bps rate increase at the October and December meetings, which would bring the Deposit Rate to 1.00% by the end of 2022. We anticipate that will be the peak during the current cycle—as inflation begins to recede by 2023 and growth slows sharply, we see the ECB keeping interest rates steady through most, if not all, of next year. In essence, after today's announcement, we anticipate a shorter, sharper rate hike cycle from the European Central Bank than previously.

ING:

As regards the TPI, the ECB doesn’t clarify what kind of market developments would trigger purchases. What is clear is that there will be a lot of conditionality of which only part has been disclosed. The ECB explicitly mentions four indicators, which all relate to regular European fiscal and economic policy monitoring as compliance with the fiscal rules, no excessive macro-economic imbalances, sustainable government debt and compliance with the European national reform programmes to get funds from the European Recovery Fund. A country doesn’t have to apply for ECB support, this is up to the ECB’s discretion. All in all, it could work as conditions are lighter than with previous programmes and the size is unlimited. It might not be a whatever-it-takes but rather a whatever-we-want tool.

We all know that today’s rate hike will not bring down inflation in the short run – not even on the demand side of the economy, which will react much more to the looming recession than to any ECB action. The hike, as well as potential further hikes, are all aimed at bringing down inflation expectations and to restore the ECB’s damaged reputation and credibility as an inflation fighter. Today’s decision shows that the ECB is more concerned about this credibility than about being predictable. This matters more than forward guidance.

Today’s decision conforms with our previous view that the window for the ECB to continue with what Lagarde back in June had still called a long journey is closing fast. We expect the ECB to deliver another rate increase by a total of 50bp before winter starts. Thereafter, we currently don’t expect further rate hikes. Instead of a long rate hike journey, the ECB’s policy normalisation currently rather looks like a short trip.

TD Securities:

Inflation is set to continue at multi-decade highs as energy prices show limited signs of easing. Moreover, the specter of a shortage of natural gas supplies looms, raising the risk of sharply slower output growth and another inflationary shock. Policymakers are going to shift to a "meeting-by-meeting" timeline for rate decisions as the economic outlook gets increasingly cloudy.

The Governing council is concerned with price stability over the medium-term, a time horizon where inflation expectations play a major role. As such, the statement emphasized the role of both the TPI and the larger than expected rate hike in helping both maintain well anchored inflation expectations and influence demand conditions such that they, "adjust to deliver its inflation target in the medium term".

Despite the economic risks facing the euro area, we expect rate hikes to continue through the rest of the year as policymakers seek to keep medium-term inflation expectations anchored.

Danske Bank:

We are gloomier on the economic outlook, which ultimately is set to take inflation expectations lower than the ECB conveys. We no longer expect the ECB to hike policy rates in Q1 next year. We expect the ECB to hike by 50bp in September and 25bp in both October and December. We see risks slightly skewed to fewer hikes. That means that we anticipate a cycle hike of 1% on the deposit rate. We still like to sell ECB-induced EUR rallies and still pencil in EUR/USD firmly settling below parity over the coming quarters.