LONDON (Reuters) – The European Central Bank confirmed on Thursday it will end a long-running bond buying scheme on July 1 and signalled a string of interest rate hikes from July as it battles stubbornly high inflation.
With price growth surging last month to a record-high 8.1% and broadening quickly, the ECB is rolling back stimulus measures it has had in place for most of the last decade.
It aims to stop rapid price growth from seeping into the broader economy and becoming perpetuated via a hard-to-break wage-price spiral.
MARKET REACTION:
The euro briefly slipped after the ECB decision before turning higher while money markets ramped up bets of more policy tightening from the central bank by the end of 2022. Benchmark 10-year German bond yields rose to fresh eight-year highs at 1.41%.
REACTION:
ROBERT ALSTER, CEO, CLOSE BROTHERS ASSET MANAGEMENT CIO:
“Holding rates at minus 0.5% despite record inflation, the ECB looks late to the party compared to the Fed. The ECB does appear to be joining the ‘hike-brigade’ but we do not expect Europe to attempt to overtake the Fed. Rather, the ECB is simply following the US lead, and we do not expect more aggressive tightening whilst the war in Ukraine continues to weight on sentiment.”
SAM COOPER, VICE PRESIDENT OF MARKET RISK SOLUTIONS, SILICON VALLEY BANK:
“Euro direction will be dictated by the timing and the pace of future interest rate hikes beyond July, in particular any hints that we could observe increases in 0.50% installments rather than 0.25%. Focus will now turn to ECB President Lagarde at the upcoming press conference, any deviation from market expectations could send further shockwaves to the euro and the wider FX market.”
ARNE PETIMEZAS, SENIOR ANALYSTS, AFS GROUP, AMSTERDAM:
“I think it is pretty weak. I don’t understand why they don’t end negative rates at one go in July. Instead they fix July at 25bps. They also make the same mistake of lowballing inflation in their new forecasts. 50bps in September is thus very likely. The ‘sustained’ and ‘gradual’ language suggest they see more hikes in 2023 than is currently priced in by OIS. It would be better if they acted more forcefully in the near term instead of pushing things out to the future, which as we all know is very uncertain.”
(Reporting by London Markets and Finance Teams; Compiled by Saikat Chatterjee; Editing by Chizu Nomiyama)
