A couple of key takeaways from the ECB yesterday:
- Forward guidance is irrelevant; whatever the central bank preached in June is all out the window and future policy decisions have now moved on to a meeting-by-meeting scenario
- ECB policymakers may be more comfortable with frontloading rate hikes, which could see a more than 50 bps rate hike in September
- However, the terminal rate has not really changed so the end goal remains the same although Lagarde herself does not know where that is ¯\_(ツ)_/¯
- Introduction of Transmission Protection Instrument (TPI) to deal with fragmentation risks but the ECB will be the judge, jury, and executioner of said mechanism
BofA summed it up pretty well. From "whatever it takes" to "whatever".
That's the main message from the ECB policy decision yesterday as they throw the old playbook out the window and are now going to take every meeting as a "live" one. After preaching to raise rates by 25 bps for months now, they decided to go with 50 bps yesterday and that is reason enough for markets to abandon trust on the central bank's messaging.
If frontloading is the narrative, then markets will seek to price that on their own now surely. The difficult part though will be trying to determine where and when the ECB will stop. In her press conference yesterday, Lagarde herself struggled to deliver an answer on that. I think that pretty much says it all.
Lagarde's at the wheel. And there is nothing standard about the make up of the ECB right now. Everything feels like a mess as the central bank looks trapped in dealing with inflation risks while staring down an economy that is heading towards a recession.
Throw in fragmentation risks and things just look utterly shambolic at the moment. As great an institution the ECB is, central bankers should not be the ones in charge of delivering the verdict on which countries should get a "bailout" under the TPI. It is a very slippery slope to go down and I don't think many politicians will be happy about that.
Sure, things look alright now when all countries are said to be eligible under the central bank's criteria. But all it takes is one to stray offside and suddenly the whole framework will start to be questioned.
As for the euro currency, the frontloading of rate hikes will do little to change market perception about the economic prospects of the region. The fact that Lagarde says that such a step may not result in a shift in the terminal rate is enough to convince punters of their bets that the ECB will not hike rates beyond the end of the year.
With all that priced in, the only thing left is whether or not the ECB can hold its commitment on "closing the spreads". That being said, I'm not sure that is enough to lift the currency when the overall outlook remains rather bleak.
