The ECB is holding an unexpected meeting, where to hurry ?, Market News

If the decision on the monetary policy of the US Federal Reserve at the end of the two-day session was programmed for a long time and watched as milk on fire, operators, the decision impromptu meeting of the Board of Governors of the Central European Bank was a surprise this Wednesday morning. It is scheduled for 11:00 (CET), ie noon Paris time.

Object? ” Discuss current market conditions said a spokesman for the institution, as profitability has fallen in all eurozone countries and the spread has widened, especially between Germany and Italy, where 10-year rates for the first time since 2014 crossed the 4% threshold. The gap between the two countries, otherwise considered a “measure of fear” in Europe, is the largest since early 2020. This morning, the market seems to have calmed down as rates weakened somewhat, especially over the 10 Italian years, falling slightly by 20 basis points to 3.4029%.

What is the inflation rate in September?

The general movement, of course, is due to the less accommodating attitude of the European Central Bank, which last week withdrew from its reserves in connection with a meeting on monetary policy, which revealed that key rates will be raised by 25 basis points at the July meeting, the first reinforcement since 2011.

With inflation at 8.1% in one year in the eurozone in May, the ECB had no choice but to prepare people’s minds to raise rates at the next meeting. The interest rate on deposits will decrease from -0.5% to -0.25%. Basically nothing more than usual. Investors’ concerns are mainly about the scale of the further increase. If inflation persists or worsens, the central bank may raise the key rate by half a point in September.

Where are the tools against fragmentation?

The announcements that cooled the market last week, as well as the lack of reaction to “anti-fragmentation” instruments, whose role is to avoid widening the spreads between countries. We remember ten years ago the outbreak of the European debt crisis, when interest rates on “peripheral” eurozone countries soared from “major” countries. This risk of fragmentation reappears today with a 2-point gap between the yields on ten-year German and Italian bonds.

According to Christine Lagarde, the European Central Bank will ensure the cessation of the purchase of securities, which has made interest rates in member countries more homogeneous, giving preference to “peripheral” countries and raising key rates. will not lead to further fragmentation of borrowing costs of different Member States. ” We will know how to develop and implement new tools if and when needed she told. However, urgency may be in order to decide on this meeting of the day.

Several options

The first option available to the ECB to limit spreads would be to reinvest the proceeds from maturing bonds in its huge portfolio of assets in troubled markets. Then the bank could, if necessary, create new instruments in a very short time, said Isabel Schnabel, a member of the central bank’s executive board, this week.

The ECB’s rejection of ultra-accommodative policies is a response to the urgent need to combat the rise in prices caused by the war in Ukraine. In its new quarterly forecasts, the ECB has significantly raised its inflation estimates. Consumer prices are now expected to rise by 6.8% this year and then by 3.5% in 2023 after 2.6% in 2021. Inflationary risks are mostly growing “This was stated by ECB President Christine Lagarde, referring, in particular, to rising wages and disruptions in supply chains.