- All main rates hiked by 50bps, more than markets expected
- Transmission protection instrument (TPI) introduced
The Governing Council raised all three key ECB interest rates by 50bps – more than markets and most economists have expected. As we expected, new transmission protection instrument (TPI) was introduced, which was the necessary precondition enabling the ECB to start hiking interest rates in larger steps. The TPI can be activated to counter “unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area”.
Purchases are not restricted ex ante, but activation of the TPI will be conditional on four criteria – compliance with EU fiscal framework, absence of severe macroeconomic imbalances, fiscal sustainability, and implementation of sound and sustainable economic policies. ECB plans to rely on the analysis and assessment of the European Commission, ESM and the IMF to determine if these criteria are met.
During the press conference President Lagarde has refused to commit to 50bps hike in September and scrapped its forward guidance, indicating that further interest rate hikes will be data dependent (naturally). There are signs that economic growth is slowing across euro area. PMIs have eased, household purchasing power is falling, demand for loans has declined, consumer confidence is lower than it was at the start of the pandemic, while business confidence is also shaky.
We see inflation peaking this summer, inflation will start receding in autumn, while economic growth will weaken or stagnate. In this environment there will be less room for further aggressive interest rate hikes, thus front-loading interest rate makes sense. We reiterate our forecast that the ECB will increase interest rates by another 50bps in September, which will be followed by two 25bps hikes in October and December. By the end of the year weaker economic activity and receding inflation is likely to make the ECB to end this hiking cycle (sooner and at a lower point that the markets currently expect).
