Analysis

ECB Review: 50bp and TPI but the hiking cycle is set to be short

  • Today, the ECB announced its first rate hike in 11 years to fight off inflationary pressure. It hiked the three policy rates by 50bp in a unanimous decision, thereby deviating from its previous guidance of 25bp at the Sintra conference. There will be more rate hikes but the size will be set meeting by meeting and the previous guidance therefor no longer applies.
  • The ECB also announced a new anti-fragmentation tool, the so-called Transmission Protection Instrument (TPI). Tomorrow's survey of professional forecasts may also show a high inflation expectation justifying the larger move.
  • The ECB's assessment of growth and inflation outlook was broadly unchanged from June.
  • 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. 

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