MNI ECB Preview - July 2022: Tightening As Economic Headwinds Build

Tightening As Economic Headwinds Build

• The ECB is likely to hike policy rates by 25bp in July as already telegraphed. While there does not appear to be enough momentum behind a larger move for now, it should not be discounted entirely. Indeed, it may prove easier to hike aggressively now, than attempt to do so later in the year should economic activity abruptly deteriorate.
• The ability of the ECB to provide additional guidance on the path for policy rates from September onwards has become more challenging.
• The ECB needs to credibly signal its commitment to rein in inflation at a time when it has fallen far behind its peers in tightening policy. However, pre-committing now to specific policy outcomes at future meetings when there is a growing risk of outright recession, would be a risky play from a credibility perspective.
• We expect the ECB to reiterate that it anticipates a gradual but sustained path for further increases in policy rates, alongside being data dependent, while not providing any further specific rate guidance for now.
• A sufficiently large (likely limitless) and flexible anti-fragmentation tool is expected to be announced at the July meeting. Delaying the announcement would be risky for spreads given the previous market disappointment at the unscheduled mid-June meeting for discussing fragmentation risks.

ECB Preview July 2022.pdf