PRIMER: Account of the ECB's July meeting due to be released Thursday 25th August at 12:30BST/07:30EDT

Analysis details (14:33)

Despite expectations for a 25bps hike across the ECB's three key rates, policymakers opted to "go big" and deliver 50bps worth of tightening, taking the deposit rate to 0% and therefore drawing a line under the Bank's NIRP. Alongside this, the Bank refrained from providing explicit guidance for the September meeting and instead adopted a meeting-by-meeting approach. The Governing Council was also able to agree on an anti-fragmentation tool named the Transmission Protection Instrument (TPI) aimed at ensuring that the monetary policy stance is transmitted smoothly across all euro area countries. That said, PEPP will remain the first line of defence to counter risks to the transmission mechanism related to the pandemic. President Lagarde said that the Governing Council rallied around the consensus of a 50bps hike and that the ECB is accelerating the normalisation process, but not changing the ultimate point of arrival. In terms of the details of TPI, Lagarde noted that all nations are eligible, the ECB is capable of "going big" on the instrument, whilst the activation of TPI is at the discretion of the Governing Council. Lagarde later clarified that the four conditions for TPI are as follows: 1. Compliance of EU fiscal framework, 2. Absence of severe macro imbalances, 3. Fiscal sustainability, 4. Sound and sustainable macro policies. Any further colour around the discussion held on TPI and how it could be implemented would be of note for markets. Some commentators were quick to suggest that Italy might fail to satisfy such criteria and as such, the IT/GE 10yr spread was unable to narrow from the levels prompted by the resignation of Italian PM Draghi. Furthermore, the follow-up press release noted that purchases under TPI could be suspended if it is judged that persistent tensions are due to country fundamentals. Overall, given the fast-paced nature of inflationary developments within the Eurozone any policy signals towards the September meeting will likely be deemed as stale, particularly given the ongoing surge in Eurozone electricity prices since the meeting which have added further pressure to the price outlook within the region. As it stands, markets currently price in 42bps of tightening for the September meeting.

25 Aug 2022 - 08:09- Fixed IncomeResearch Sheet- Source: Newsquawk