“After over a decade of ultra-low rates, the ECB is set for its policy liftoff on July 21st, following the majority of central banks of the major economies. Policymakers already announced in their last meeting that the hike, the first since 2011, will be of 25bps across all the three key interest rates. Some governors preferred to keep the door open for a larger increase, and these voices might grow louder should the final inflation print for June surprise above the already high 8.6%.

While the ECB might stick to its announcement for this month, the broadening inflationary pressures, aggravated by the increasing risks of energy shortages, will likely favour a hawkish inclination for the ECB in the near term. Policymakers might confirm a steeper hike in September of 50 bps, and further hikes later this year. Despite the historic day, investors will be even more focused on the new anti-fragmentation tool the ECB is designing. A new “backstop” tool could be unlimited in size and entail macro conditionality, and with liquidity sterilisation. But the devil will be in the details, and recent comments from Governors suggested there are still different views. Therefore, there is the risk that President Lagarde might not be in a position to provide all the answers, with the risk of causing more volatility in the markets. Ultimately, we would expect the ECB to be effective at limiting sovereign risks.”