ECB Quid pro quo - bigger rate hike in exchange for TPI support

The ECB hiked its policy rates by 50bp at the July meeting and introduced the Transmission Protection Mechanism as a new policy tool . Both decisions were closely related and the 50bp was the “price” for getting u nanimous approval of the T P I. Going forward, the ECB will decide its rate path on a “ meeting-to-meeting approach ” . That said, t he establishment of the TPI allows the ECB to continue normalization with less concern for the potential “collateral damage” to peripheral countries. We expect a 50bp hike at the September and October meeting followed by 25bp in December, implying a depo rate of 1.25% by the end of the year.