The Day at a Glance | Jul 21 2022

The Top

*ECB surprised markets with a 50bp interest rate increase.

*Russia resumes its supply of gas to Europe via the Nord Stream pipeline after maintenance.

*Canada will join the US to reclaim violations of the USMCA on behalf of Mexico´s energy policies.

*Mario Draghi resigns as Prime Minister of Italy, new elections could take place in October.

*The Central Bank of Japan maintains ultra-accommodative monetary policy; forecasts 2.3% inflation this year.

*Retail sales in Mexico increased more than expected during May (0.5% m/m; 5.2% annual).

*Russia plans referendum in September to annex occupied territories in eastern and southern Ukraine.

*Spain and Portugal against plan to reduce gas consumption in EU; Poland, Hungary and Italy also raised concerns about the block´s proposal.

*Jobless claims in the US increased to 251,000; their highest level since last year.

Economic environment

Higher rates in Europe. This morning the European Central Bank decided to increase the interest rate in 50bp, which is the Eurozone´s first hike in the last 11 years, and the largest since 2000. The decision surprised markets as the ECB had announced a more moderate increase (25bp) in previous weeks, although there was speculation about the likelihood of more of an aggressive increase due to high inflation. The deposit rate went from -0.5% to 0%, the monetary policy rate went from 0% to 0.5% and the marginal lending facility rate went to 0.75%; the hikes were widespread and were carried out in the entire Eurozone. Additionally, the ECB approved the Transmission Protection Instrument (TPI), which was designed to maintain interest rates in long-term sovereign debt instruments stable among countries in Europe´s periphery (Italy, Spain, Greece, etc.) and successfully carry out a monetary policy transmission. The ECB pointed out that it made its decision based on inflationary risks and the need to anchor inflationary expectations as it seeks to adjust demand conditions that could allow the medium-term inflationary target to be reached. Furthermore, the ECB considered it appropriate to continue increasing rates as necessary (there is no guidance as to how the rates will be increased). Interest rate hikes are expected to depend on data, which confirms the ECB´s dependency on new information. As for the TPI, it will be activated to counter unwanted market dynamics that could hinder the transmission of monetary policy among the Eurozone´s countries. The plan considers increasing bond purchase volumes in countries that show risks of volatility without any foreseen restrictions in the purchasing program. It would use available resources from matured assets purchased during the last two years of the pandemic emergency purchasing program (PEPP), which gives full flexibility for their reinvestment.

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