Highlights:

• At today’s meeting the Governing Council (GC) lifted its key rates by 75 bps. With the deposit rate in positive territory again, the ECB suspended the two-tier system for the remuneration of excess reserves. 
• Continued flexible reinvestment of Pandemic Emergency Programme Purchases (PEPP) shall counter risks to monetary policy transmission. Temporary remuneration of government deposits shall also support policy transmission. However, we think this too little to counter dislocations at the front end of the curve.
• The GC’s decision was taken unanimously. It wants to frontload “the transition from the prevailing highly accommodative level” and expects further rate increases over the “next several meetings”. During the Q&A President Lagarde maintained a hawkish stance but gave no hint about the terminal or neutral rate and left the possibility of further bold hikes open. 
• In the Q&A, Lagarde also suggested that rate hikes will remain the key policy tool for the time being. But in due course Quantitative Tightening (QT) and potential profits from deposing large amounts of TLTRO borrowing will be discussed. 
• Given today’s hawkish message we now even see upside risks to our adjusted year-end policy rate forecast of 1.75% and think that QT will become a topic for 2023. The ECB’s hawkish stance amid the materializing energy crisis make a euro area recession a near certainty in our view. 
   

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