Talking markets: Investors reassess expectations for ECB rate rises after Ukraine invasion
Summary
- Money markets are pricing in an ECB interest-rate rise of less than 15 basis points in December, according to Refinitiv data
Eurozone government bond yields slid by a historic magnitude on Tuesday as investors substantially downgrade expectations for how much and how fast the European Central Bank will raise interest rates this year, analysts said.
Russia’s invasion of Ukraine has swiftly led to a thorough reassessment of how the ECB will exit its long-held ultra-accommodative monetary policy.
Inflation looks here to stay and this still argues for higher interest rates. However, the consequent risks to growth are likely to make ECB policymakers wary of tightening too fast and hampering the economy even further.
Money markets are pricing in an ECB interest-rate rise of less than 15 basis points in December, according to Refinitiv data. A few weeks ago they still expected a total of almost 50 basis point rate rises during 2022.
“Headwinds to activity, deteriorating financing conditions and huge uncertainties will likely make the ECB’s Governing Council less decisive on the future policy path," said Martin Wolburg, senior economist at Generali Investments, in a note.
The ECB’s March 10 meeting is broadly expected to reflect the tug-of-war between the prospect of even higher inflation and the risk of an economic slowdown. The European Union’s statistics agency Wednesday said consumer prices were 5.8% higher in February than a year earlier, an acceleration from the 5.1% rate of inflation recorded in January.
Prior to the war in Ukraine, the market had also envisaged the ECB would flag an early end to the Asset Purchase Programme around the third quarter, but a decision on this is likely to be delayed, analysts say.
“Quantitative easing is likely to prevail for the time being and the risk is that the first rate hike is postponed beyond September or maybe even December," Wolburg said.
On March 10, Lombard Odier Investment Managers expects “no decision [from the ECB], no change for one quarter or two quarters, depending on the situation," Florian Ielpo, head of macro and multi-asset portfolio manager at Lombard Odier, told Dow Jones Newswires.
The ECB will be cautious in winding up its accommodation in order to avert recession, he said.
On Tuesday, the yield on the 10-year Italian government bond, or BTP, fell more than 30 basis points, while the 10-year German Bund yield returned to negative territory after a 21 basis point slide, which was the largest daily fall since the euro crisis over a decade ago, according to Deutsche Bank. Ten-year eurozone yields dropped by 20 to 30 basis points across the board, according to Tradeweb.
Eurozone government bond yields trade higher on Wednesday, paring part of the gains they made on Tuesday. Bond yields move inversely to prices.
“Massive flight-to-quality moves are evident across currencies and tenors, and the market seems convinced that the European Central Bank is about to strike a much more cautious tone at its March meeting," said ING’s rates strategists in a research note.
The timeframe of the crisis will be crucial, as a prolonged period of uncertainty with rising escalations could lead to further repricing across global risk premia, said Amundi Asset Management.
“Central banks will be in the spotlight and they may at some point have to adjust their agendas to address rising stagflationary risk," it said.
This story has been published from a wire agency feed without modifications to the text
