Ecb preview how to hike rates without creating more market turmoil

Key arguments

• The ECB is expected to hike rates by 25bp next week, supported by recent resilience in the eurozone economy and elevated oil prices.
• Headline inflation remains above 3% and is energy-driven, making further hikes beyond September less sensible.
• The staff projections may be revised up slightly due to statistical revisions and higher oil prices, but no major changes are expected.
• Recent bond yield surges are tightening financial conditions, which the ECB sees as helpful but must be managed to avoid excessive or unequal tightening.
• The ECB may need to use the Transmission Protection Instrument if debt sustainability concerns grow, but that is not for now.
• The ECB's reaction function suggests a 'dovish hike' rather than the start of a prolonged tightening cycle.

Corresponding source evidence

1. As long as inflation remains mainly energy-driven, hiking rates further beyond next week would not make a lot of sense and could harm the eurozone economy The European Central Bank looks set to hike rates by 25bp next Thursday The stage looks increasingly set for another rate hike at next week's European Central Bank meeting. · next week
2. With oil prices remaining elevated and the risk of a fresh gas price shock increasing, it will be hard for most ECB policymakers not to see a clear case for another rate hike.
3. Given that the cut-off date for the staff projections is normally some two weeks before the Governing Council meeting, the latest surge in bond yields as well as higher energy prices again will not have played a role in the forecasts.