🏦🇪🇺ECB Monetary Policy Desk Reactions

UBS:

ECB President Lagarde said it is test practice' among central banks to start the cycle with an 'incremental' increase, and that in any case today's agreement was not just on July but also about September and beyond. It is not entirely convincing in my view to just refer to best practice and if the next CPI is bad enough the hawks may well come and push for 50bp in July. In any case, once again the hawks/doves compromise is pretty obvious, and to Lagarders credit she managed to get everyone on board unanimously. Today's communication does very much have a hawkish bias which is rightly reflected in the rates reaction.

Bloomberg point out an important footnote in the ECB's staff forecasts. Inflation realized higher than was entered in the original forecast. In other words that qualifier of September being a 50bp hike if inflation persists or rises, is almost certain to be met. The footnote explains May 2022 CPI was 8.1%, much higher than the number the staff economists had assumed and incorporated into their model (prior to the data publication). There wasn't enough time to rework the projections, so it was left as was. But, if it had been included, then the inflation forecast for this year would have come out at 7.1% rather than 5.8%.

ING:

Our view remains that in the current unstable environment for global sentiment and as the Fed pushes through with 50bp rate hikes during the summer, the dollar should remain supported. As we don’t see markets having a solid basis for turning substantially bullish on the euro and given the non-negligible downside risks to the eurozone’s outlook, we continue to see a return to 1.0500 as the most likely scenario over the summer and into 3Q22.

Today’s decision illustrates that the ECB is willing to engage in a series of rate hikes. Given that the ECB’s own growth forecasts currently look very optimistic, there is, however, a high risk that there will be far fewer rate hikes beyond September than today’s ECB meeting suggested. The ECB clearly wants to go beyond ‘just’ ending unconventional measures but whether it will really get there is far from certain. The journey Lagarde talked about today could be much shorter than the ECB thinks.

BMO:

The ECB didn't beat around the bush. It actually announced when and by how much it would raise rates. At its July 21 meeting, it intends to raise key rates by 25 bps. And, it will do so again at the September 8 meeting, but it left the door open for a 50 bp hike by saying that "If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate...". That sentence, by the way, was crafted "very carefully", according to the ECB head. Given that President Lagarde spoke of "upside risks" to inflation, and given the way prices around the world have been going and are headed, a 50 bp'er is very likely at this point.

At the July 21 meeting, the ECB will raise rates for the first time in eleven years, the first step on the path to leaving negative rates behind. It will be a series of hikes in their "journey to get to 2% in the medium term".

Nordea:

The ECB’s hawkish twist continues, and we now expect the central bank to follow an expected 25bp rate hike in July with 50bp hikes in September and October, before resuming to the 25bp pace in December.

However, given that the market is now roughly pricing in two 50bp rate hikes for this year, that already seems a lot. Even the Fed pricing moderates after a path of three consecutive 50bp hikes, and arguably the price pressures are still much stronger in the US. However, longer out the ECB pricing still converges to levels below 2%, probably not at least much above levels considered neutral. Longer out then, if inflation pressures persist, the ECB may have to go clearly above neutral