Lagarde Presents Roadmap In Three Acts; Confirms July Rate Hike Plans

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Peter Allen Goves (MFS Investment) | The June ECB meeting had several new and meaningful policy announcements compared with the last meeting. In general, policy decisions were in line with Lagarde’s previously announced roadmap, but there were various hawkish twists and adjustments. In our view, the policy statement further justified curve flattening and affirmed the bear market status for euro rates, not least given the inflationary backdrop.

Much of this meeting is likely to be assessed relative to Lagarde’s previous blog on the roadmap for policy normalization. At the ECB meeting, she presented a roadmap in three acts. One, July’s meeting will likely see a 25bp hike as detailed in the blog. Interestingly for September, the ECB suggested a larger increment could be appropriate should conditions warrant it. And third, beyond September a gradual by sustained hiking path is anticipated.

In addition, the medium-term inflation projection is now above target at 2.1%.

Overall, the fact that a hike above 25bp is possible, however unlikely, or not, means that the market will have to contend with such hike premia. Hiking above 25bp as a scenario is now non-zero. This is likely to keep the front-end sensitive to upcoming inflation data and macro conditions. Elsewhere, the ECB stressed that the smooth transmission of monetary policy remains critical. This is something EGB spreads will remain pre-occupied with for now.

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