European Central Bank exits negative interest rates

Wells Fargo Research Team Wells Fargo

Summary

The European Central Bank (ECB) joined the global rate hike cycle at today's announcement, delivering a larger-than-expected 50 bps Deposit Rate increase, to 0.00%. The ECB said a further normalization of interest rates would be appropriate at upcoming meetings.

The ECB also approved the Transmission Protection Instrument (TPI), a tool aimed at supporting orderly conditions across Eurozone government bond markets, in particular the region's peripheral markets such as Italy and Spain. While full details are yet to be released, the ECB said purchases using the tool are not restricted ex-ante, and that the scale of TPI purchases depends on the severity of the risks facing policy transmission.

We believe inflation remains elevated enough, and inflation risks worrisome enough, to continue with a more forceful pace of rate hikes for the time being. 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.

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Wells Fargo Research Team

Wells Fargo

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