We think perseverance today means undoubtedly raising rates by 25 bps in July, possibly in September, and not wavering in ‘our commitment to ensure that inflation returns to 2% over the medium term.’ 

The effectiveness of tighter policy is debatable when real rates are negative and unit labour costs are growing at twice the rate of the inflation target. Since her last visit to the Garden of the Feitoria da Condessa – and following a stretch of 400 bps of hikes – core inflation has mushroomed from 3.7% to 5.3%. If our economists are right, it will accelerate to 5.6% when the June data is published on Friday.

EUR/USD fell 0.7% during her speech last year. The 10y EUR IRS rose 8 bps. A repeat today would pin EUR/USD back below 1.09 and help 10y swaps to fend off the receiving pressure around the 200-DMA at 2.95%.