At the July meeting, the European Central Bank (ECB) will confirm its policy sequencing. The main focus will be the anti-fragmentation scheme named “Transmission Protection Mechanism”.
Please find below what we expect:
- As preannounced, the ECB will increase its three key interest rates by 25 bps after having ended its Asset Purchase Programme (APP) on 1 July; we do not expect the ECB to surprise markets with a 50-bps move.
- The overall tone will in our view remain very hawkish considering the latest inflation figures and the downward pressure on the exchange rate.
- We also expect President Lagarde to reiterate that the pace of policy tightening will be guided by optionality, data-dependence, gradualism, and flexibility. She will confirm that the key ECB interest rates will rise again in September, with the calibration of this rate increase depending on the updated medium-term inflation outlook.
- She will likely reaffirm the ECB’s very strong commitment to act against unwarranted fragmentation. The ECB will also provide more details about the so called “Transmission Protection Mechanism”, its new bond-buying program. We expect this plan to be unlimited, with light conditionalities and 100% sterilized. It will be a difficult exercise in communications for the ECB, with a lot of questions around this new plan: what does “light conditionality mean exactly? What are the “right” circumstances under which the tool could be deployed? Is the ECB going to favor specific parts of the curve?
- We also expect the ECB to confirm discussions to modify TLTRO (Targeted longer-term refinancing operations) III eligibility requirements given the accelerated pace of monetary policy normalization.
All in all, the main risk would be to see the ECB fall short of market expectations regarding the new plan. The ECB has a difficult exercise in communications, especially given new political turmoil in Italy. Ahead of this meeting, we remain cautious on peripheral bond spreads, and we still see a potential for more flattening across European curves
Disclaimer
This commentary is intended for non-professional investors within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. Past performance is not indicative of future performance. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.