A 25bp rate hike from the ECB this week is essentially a given. This outcome has been well communicated in advance by most members, and should not in itself lead to any noticeable market reaction.

The focus will be on guidance ahead of the September meeting, where a pause or more definite stop to the rate hikes are on the table. The communication dilemma that ECB face is a trade-off between the lagged effect of monetary policy measures already taken and the strength of the incoming data. Therefore we do no expect a firm guidance for September, either for a pause or a hike, but a repeat of data dependence and in particular in light of the significant amount of data released before the September meeting.

The weakening growth momentum, as well as some softening in core inflation measures will be the decisive for a potential final hike of 25bp at the September meeting. Further deterioration may change our baseline expectation of a final hike in September.

Markets price 25bp for this week and another 20bp to a 3.95% peak in the deposit rate. We find that pricing fair.

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