Goodbye negative rates and predictability

The ECB is improving its approach

The ECB decided to take further steps to integrate climate change into its monetary policy. It aims to gradually decarbonize its balance sheet in line with the Paris Agreement. It will direct its assets to issuers with better climate performance through reinvestment.

Currently, 40% of the ECB’s bonds are held by companies with a high carbon content. As for carbon-intensive companies, by 2028, 35% of maturing bonds will be companies emitting more than 100 tonnes of CO2 per billion of revenue. Thus, the ECB will reinvest 150 billion euros in more climate-friendly enterprises. A significant amount. In 2021, companies eligible for the ECB’s purchase program issued €80 billion.

The French Agency for International Investments (AFII) identified 25 fossil fuel-intensive companies on the ECB’s balance sheet, which together emit 4.5 billion tonnes of CO2, or 90% of the portfolio’s total footprint. The list includes oil majors Shell, TotalEnergies, BP, ENI and Repsol, as well as commodities trader Glencore, cement producers Holcim and Buzzi Unichem, steelmaker ArcelorMittal, oil and gas company OMV and utilities E.ON, Fortum and Engie Alliance .

Fossil-intensive companies will face higher refinancing costs due to less demand from the ECB.

A day like no other

4,032 days is a long time between two rate hikes. The decision of the ECB remains historic! The Federal Reserve has raised rates 12 times since the ECB last raised in 2011, the Bank of England 7 times and only the Bank of Japan has not raised rates at all. The ECB raised its key rates for the first time in a decade with a bang (50 basis points) and left the negative territory adopted in 2014.

2022.07.29.  G7 rates

The decision shows that the “conservatives” must have been trembling, fearing that a promised September rate hike of more than 25 basis points could be buried by the prospect of a recession. This increase, along with other potential ones, is aimed at lowering inflation expectations and restoring the reputation and credibility of the ECB in its fight against inflation. The ECB is more concerned about its credibility than predictability. That’s why he replaced his “prospective leadership” with a meeting-by-meeting approach. The ECB will not be able to raise rates as much in the coming months as the markets expected after the June meeting.

07/29/2022.  ECB interest rate expectations

Mario Draghi has resigned as Italy’s prime minister, paving the way for early elections. The latest political crisis is not only creating uncertainty for Italy. It also increased pressure on the ECB a few hours before the meeting. The ECB introduced a new tool. The Transmission Protection Instrument (TPI) will complement the existing toolkit and can be activated to counter unwarranted and disorderly market dynamics that seriously threaten the transmission of monetary policy in the euro area.

This is only short-term relief for the euro as political tensions spread across Europe.

A slowing economy will prevent the ECB from sharply raising interest rates, despite historically high inflation.

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