Broadening and intensifying inflation pressures have prompted the ECB Governing Council to end net bond purchases under its asset purchase program (APP) as of 1 July. This paves the way for a 25 bps interest rate hike later next month, which will in all likelihood be followed by a further adjustment at the September meeting. Depending on the inflation outlook at the time, the size of the September move could well be 50 bps.
The ECB signaled that it foresees a “gradual but sustained” path of further rate hikes thereafter. As for the reinvestment of its quantitative easing (QE) holdings, the ECB decided to continue reinvesting the principal payments from maturing securities “until at least the end of 2024” (in the case of securities under the Pandemic Emergency Purchase Program (PEPP)) or “for an extended period of time past the date when it starts raising policy rates” (for securities under the APP). Importantly, this shows that, for now, the ECB is reluctant to follow central banks such as the US Fed on the path of quantitative tightening (QT).
President Christine Lagarde addressed concerns about a possible fragmentation in bond markets across the Eurozone at the ECB media conference. She once again gave the assurance that the ECB would deploy existing or “new” tools, if necessary, should there be a sharp and broad-based widening of government bond spreads over German Bunds. Her comments underline that some ECB governors are deeply worried about a possible revival of such fragmentation during the policy rate normalization process that lies ahead.
Market reaction thus far
By hinting at a series of rate hikes, which could include increments of more than 25 bps, the ECB gave a hawkish signal, which in turn drove bond yields higher. The 2-5-year segment of the curves led this move. Meanwhile, country spreads over Germany, especially that of Italy, widened, most likely because the ECB language on new tools to address bond market fragmentation disappointed in that it lacked substance on the development of such a tool.
An ECB rate hike in July – the first in over ten years – now looks to be a certainty. An end to negative policy rates by September also seems to be a sure thing. Given the prospect that European inflation could rise to further above 8% over the coming months, we understand why financial markets are pricing in almost 150 bps of rate hikes over the four remaining ECB policy meetings this year. Notably, this encompasses two moves of 50 bps each, and two hikes of 25 bps each.
Looking beyond the next six months, though, we struggle to believe the ECB will be able to hike the depo rate by an additional 100 bps to around 2% and maintain that level, as is implied by forward rates (see chart). In fact, we doubt whether all Eurozone economies could structurally handle such a degree of tightening in financing conditions, especially given weakening cyclical growth. Nevertheless, we expect that a strong pricing out of rate hikes by the market will only occur when there are clear signs of an inflation retreat. Our view is that this could happen towards the end of this year or in early in 2023.
Source: Bloomberg, Robeco
As for the possibility of the ECB launching a new tool for addressing market fragmentation, there is in our view a decent chance that such a new policy instrument will be announced – and that conditions attached to it will be less strict than under the Outright Monetary Transactions (OMT) program. While we doubt it would prevent episodes of spread widening in European government bonds, the fact that it is available could cap any further widening of country spreads.
本文由荷宝海外投资基金管理(上海)有限公司(“荷宝上海”)编制, 本文内容仅供参考, 并不构成荷宝上海对任何人的购买或出售任何产品的建议、专业意见、要约、招揽或邀请。本文不应被视为对购买或出售任何投资产品的推荐或采用任何投资策略的建议。本文中的任何内容不得被视为有关法律、税务或投资方面的咨询, 也不表示任何投资或策略适合您的个人情况, 或以其他方式构成对您个人的推荐。 本文中所包含的信息和/或分析系根据荷宝上海所认为的可信渠道而获得的信息准备而成。荷宝上海不就其准确性、正确性、实用性或完整性作出任何陈述, 也不对因使用本文中的信息和/或分析而造成的损失承担任何责任。荷宝上海或其他任何关联机构及其董事、高级管理人员、员工均不对任何人因其依据本文所含信息而造成的任何直接或间接的损失或损害或任何其他后果承担责任或义务。 本文包含一些有关于未来业务、目标、管理纪律或其他方面的前瞻性陈述与预测, 这些陈述含有假设、风险和不确定性, 且是建立在截止到本文编写之日已有的信息之上。基于此, 我们不能保证这些前瞻性情况都会发生, 实际情况可能会与本文中的陈述具有一定的差别。我们不能保证本文中的统计信息在任何特定条件下都是准确、适当和完整的, 亦不能保证这些统计信息以及据以得出这些信息的假设能够反映荷宝上海可能遇到的市场条件或未来表现。本文中的信息是基于当前的市场情况, 这很有可能因随后的市场事件或其他原因而发生变化, 本文内容可能因此未反映最新情况,荷宝上海不负责更新本文, 或对本文中不准确或遗漏之信息进行纠正。