There is a case for the ECB to raise rates by 1% next week. But that would probably be too much for many policymakers to bear, so we expect them to step up the pace of tightening with a 75bp hike. It will follow that with further bigger-than-usual increases at the meetings in October and December even as the economy falls into recession. Against this backdrop, there is significant upside risk to peripheral bond spreads, particularly with policymakers seemingly reluctant to use the new Transmission Protection Instrument. But fresh rounds of asset purchases seem more likely than the ECB shrinking its balance sheet.
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