Yesterday, the ECB hiked policy rates by 75 basis points, and indicated there is more to come.
On the “dovish” side, the ECB noted that “substantial progress in withdrawing monetary policy accommodation” has now been made and expressed more concern about growth and policy transmission lags than at previous meetings.
One 25 basis point rate hike has been priced out by the market as a result of the somewhat softer language today, with the peak policy rate currently priced at around 2.7%.
The ECB didn’t provide much guidance regarding the potential interest rate destination, and remains firmly in meeting-by-meeting mode.
We expect an additional 50 basis point policy rate hike in December, and a transition towards moving in 25 basis point increments next year as the hiking cycle pivots from policy normalisation to policy tightening.
The ECB also decided to change the TLTRO terms today, eliminating remaining arbitrage opportunities and creating incentives for banks to repay part of their TLTRO borrowings early.
Repayments of money taken for arbitrage should have little implication for markets, as these funds have been sitting idle at the various national central banks and never circulated in money markets.
Minimum reserves will be remunerated at the deposit facility rate instead of the main refinancing (MRO) rate. We don’t see any front end market implications off the back of that decision.
The ECB didn’t provide much guidance on quantitative tightening (QT) today but hinted towards decisions at its upcoming December meeting.
In our baseline, we expect some form of passive APP run-off starting Q1 next year, implying an annual unwind of around €250bln of public sector securities in case of a hard stop to APP reinvestments.
