ECB preview: Another crucial meeting

The Governing Council is meeting next Thursday in the face of heightened uncertainty with respect to the growth and inflation outlook. We expect policy rates to be lifted by 25bp and a clear message that the base case for the ECB remains that “a gradual but sustained path of further increase in interest rates will be appropriate” . But the ECB will also stress the conditionality of its base case and its willingness to reconsider its normalization path should the economic outlook deteriorate sharply in case of a stoppage of Russian gas flows. We also expect the announcement of the new Transmission Protection Mechanism , though not all the details of the new scheme may be spelled out yet . While ECB President Lagarde is likely to stress the temporary nature of the instrument, owing to the exceptional circumstances the euro area finds itself in, she will also underline the ECB’s determination to secure the integrity of the monetary union , thereby trying to evoke a “whatever it takes” spirit . The fine line President Lagarde will have to walk here – also in light of the political situation in Italy - increases the risk of a “misunderstanding” and erratic market moves.