Highlights:

• At today’s meeting the Governing Council (GC) lifted its key rates by 50 bps, more than the 25 bps pre-announced at the June meeting. The key reasons for this stronger than initially foreseen rate hikes were the reassessment of the inflation risks and the launch of the announced anti-fragmentation tool, the Transmission Protection Instrument (TPI).
• The rate decision was taken by “total consensus”. The GC stated that at “upcoming meetings, further normalisation of interest rates will be appropriate". No indication about the size of the September hike was given. Instead, the “future policy rate path will continue to be data-dependent” and that a “meeting-by-meeting approach to interest rate decisions” will be taken. This keeps flexibility and stops damaging communication flexibility. 
• The ECB’s anti-fragmentation mechanism is a two-step procedure: First, PEPP reinvestment purchases are used to counter pandemic-related risks. Second, in case they are not sufficient the TPI will come into play. Its purchases are not restricted but eligibility requires compliance with the EU fiscal framework, absence of severe macro imbalances, fiscal sustainability and sound and sustainable macro policies. However, in the end its application is at full discretion of the GC.
• We doubt that the TPI will be a panacea against current market stress. But with it now in place the GC will no longer feel constrained by fragmentation as Lagarde made clear during the press conference. 
• Against this backdrop we see the risk of another 50 bps hike in September and a more than currently pencilled in year-end key rate of 0.75%. In any case, we deem current market expectations of about 1.25% as too high given our below consensus activity expectations for the second half of the year. 

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