ECB anti-fragmentation tool would allow for three 50 bps rate hikes by year-end – Deutsche

The firm argues that the ECB’s decision to pursue a new tool to contain the rout in Europe’s bond markets is paving the way for it to deliver more aggressive tightening measures in the months ahead.

“This reduces uncertainties for the second half of the year. The deployment of the anti-fragmentation tool clears the pathway for policy rate liftoff and an accelerated tightening cycle. We are adding a third 50 bps hike to our call. We now see hikes of 25 bps in July and 50 bps in September, October and December. This means 175 bps of hikes over the next six months and a deposit rate of 1.25% at the end of this year.”

Hmm, the new tool isn’t going to come any time soon in my view. I mean, good luck getting policymakers to work during the summer – especially on this. As for PEPP reinvestments, it is but a band aid at best so we’ll see. Pictet’s @fwred has a good post on that here. Besides that, economic headwinds are still a consideration that could put the ECB off from tightening more aggressively.