ECB: 50bp hike, new transmission purchase programme & the death of forward guidance

The ECB explained that the bigger move than it had signalled earlier was based on the ‘updated assessment of inflation risks’ and reflected its ‘strong commitment to its price stability mandate’. In addition the move was aimed at ‘strengthening the anchoring of inflation expectations and (…) ensuring that demand conditions adjust to deliver its inflation target in the medium term’.

The statement also signalled the welcome death of very specific forward guidance. Although the Council signalled that ‘further normalisation of interest rates will be appropriate’ it would now shift to ‘a meeting-by-meeting approach to interest rate decisions’ which would be ‘data-dependent’.

The ECB also flagged its new Transmission Protection Instrument (TPI) which aimed ‘to ensure that the monetary policy stance is transmitted smoothly across all euro area countries’. Details of the new tool will be published after the press conference.

However, it is clear that this is an asset purchase programme to fight against excessive widening of spreads. It will not be introduced now but represents ‘an addition to the Governing Council’s toolkit and can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area’. The ECB also made it clear that ‘the flexibility in reinvestments of redemptions coming due in the pandemic emergency purchase programme (PEPP) portfolio remains the first line of defence’. So the TPI is very much a plan B option.

Finally, the ECB asserted that ‘the scale of TPI purchases depends on the severity of the risks facing policy transmission’ and that ‘purchases are not restricted ex ante’. The credibility of the programme will depend on the modalities, which will be announced later.

We will publish a more comprehensive reaction later this afternoon.