(Finance) – The meeting of the ECB with almost discounted contents has not failed to create one tsunami on European marketswhich slipped after confirmation of the end of quantitative easing and a rate hike by 25 basis points in July, the first in 11 years. But the Frankfurt Institute does not rule out the possibility of half-point hikes in September, depending on how inflation moves.
The new predictions of ECB economists indicate inflation at 6.8% in 2022, to 3.5% in 2023 and 2.1% in 2024; reduced forecasts on GDP at + 2.8% in 2022, 2.1% in 2023 and 2.1% in 2024.
Spread takes off, euro down
The reaction of the markets was not long in coming. The Spread BTP-Bund touched 230 basis points, following the unleashed sell-off on European bonds following the announcement of the end of QE. The Italian BTPwhich has seen yields grow up to 3.72% from 3.47% the day before, to the highest since 2014. The yield of German Bund instead it went up at 1.45%.
According to the experts adequate reassurance from the ECB would have been lacking about the sustainability of the higher debts of the Eurozone, especially since the Eurotower has not ruled out a possible intervention with the anti-spread shield, making the differentials between the center and the periphery widen even more.
“The absence of a concrete discussion on a new support program that can avoid what the ECB calls” risk of fragmentation “unnerves investors, who now fear a further widening of the spread in a deteriorating macroeconomic environment, rising rates, a complicated financial maneuver in the autumn and general elections next spring “, he underlines Fabio CastaldiSenior Multi-Asset Investment Manager of Pictet Asset Management.
The euro also registered somewhat nervous movements in both directions, then yielding to sales and slipping up to USD 1.0633 (-0.77%), due to the expectation of a change in monetary policy and an initial rise in prices. rates of 25 basis points in July.
No surprises, all as per the textbook
“As expected, the ECB has formalized the end of QE and further strengthened the restrictive tone of recent months, paving the way for a series of rate hikes from July onwards”, he comments Giorgio BroggiQuantitative Analyst of Moneyfarm, recalling that “real rates remain negative, given that nominal rates have been increased significantly less than the rate of inflation”. According to the expert, “fears of a recession and the well-known level of debt of some major member countries may slow down the rate hike”, but “it is not unlikely that the Central Bank will be forced to keep its sights on rising prices. , even at the cost of a recession “.
Dave Chappellfixed income senior portfolio manager, Columbia Threadneedle Investments, believes that “after September, the forecast is that of a gradual but sustained path of rate hikes”. “The Council is not worried at the moment – he underlines – about the widening of peripheral spreads, which accompanied the change of direction of monetary policy this year. The flexibility of the PEPP reinvestment program seems to remain the only support to counter risks of fragmentation, at least for now “.
“The ECB has not provided any indications on the possible destination of the interest rate trajectory, nor on the neutral interest rate, and plans to increase the rates until medium-term inflation stabilizes around the target”, he claims Konstantin VeitSenior Portfolio Manager European Rates of PIMCOrecalling that “the ECB has pledged to combat fragmentation if necessary, but no details were provided at today’s meeting and, as a result, peripheral spreads have widened. We remain skeptical that the ECB will announce a back-stop credible ex ante “.
For S&P the ECB’s effective policy rate could reach 1.5% by the end of 2023, with the first 25 bps hike in all three rates expected in July 2022, and the second in September 2022, possibly more. The budget reduction will take longer, because the ECB has not yet committed to ending reinvestments of maturing securities held as part of Quantitative Easing (QE). Bond market conditions have tightened, but the effect ofexpansion of the ECB’s balance sheet on the term premium will likely continue to squeeze long-term returns approximately 90 bps, until the reduction of the balance begins.