The ECB supports the end of easy money

This is the end of the era for the bond market. About easy and cheap money. Following the extraordinary relocation of the Board of Governors in Amsterdam, the European Central Bank has confirmed that it will stop providing liquidity to the market, as it has been since 2015, from 1is July. And that it will double rates – in July and September.

The end of the Asset Purchase Program (APP) is not a surprise. This was mentioned in February. It then became legitimate as inflation in the eurozone set new records. It reached 8.1% in May (in one year), and the ECB’s new expectations predict that it will still fluctuate around 3.5% in 2023 (before falling to 2.1% in 2024).

Created in 2015 to combat the specter of deflation, APP no longer has a place in times of sharp price increases. “We must stay the course and be determined to curb inflation,” said Christine Lagarde, president of the central bank.

The cessation of net purchases of government and corporate debt securities (redemptions of securities with maturities will continue to be reinvested) has at least two consequences. First, the bond market will have to learn to live without the support of the ECB. In June, it invested another 20 billion euros, an amount that has fallen since the beginning of the year (40 billion in January). This manna has made it possible to maintain very favorable financing conditions for the eurozone countries.

The first rate increase in July

Then the disappearance of procurement opens the door, according to a scenario set by the ECB itself, to the first increase in key rates since 2011. The Frankfurt institution has confirmed that the initial increase of 25 basis points should take place from July. Unusual commitment in the world of central banks, where ambiguity is preferred. Christine Lagarde even explained that this was the “beginning of the road” to the end of the emergency measures that have been in effect since 2015.

The French have confirmed that a new increase will take place in September, and that this second turn of the propeller may be more important. Because while Christine Lagarde called the initial increase of 25 basis points a “good practice”, a move that was also defended by ECB chief economist Philip Lane, she confirmed that the ECB was ready to strike harder. “The increase in key interest rates planned for September may be more significant [que 25 pb] if the inflation forecast [de la BCE] for 2024 are equal to or exceed 2.1% “, – the President decided.

The path to normalization

“The road to normalization will not stop in September,” warns Carsten Brzeski of ING. However, Christine Lagarde assured that the rate increase will be gradual. “But,” said Frederic Ducrose at Pictet, “she said that the pace will be gradual and steady.

In other words, the Board of Governors may decide to raise the rate at each of its four meetings before December. Assuming an increase of 50 basis points in September, the deposit rate will rise to 0.75% in December, the highest level since July 2011.

Clarifications are expected

The President of the ECB was more evasive about the means that the ECB intends to use to prevent the strengthening of monetary policy from causing “fragmentation” of the euro area. In other words, increasing differences in the cost of loans between different countries, which could lead to a new euro crisis.

“If we have demonstrated in the past, if necessary, we will introduce existing or new tools. We are loyal – loyal! “It’s right to broadcast our monetary policy,” she said.

Words alone were not enough to calm the markets. The Italian 10-year rate jumped 25 basis points to 3.61%, while its German equivalent rose only 9 basis points. The gap between them reached 218 basis points, which is the highest figure in more than two years. “As the reaction of the bond markets to the press release and press conference shows, the ECB looks” disarmed “in the face of tensions over spreads,” Aurel BGC concluded.

The French have exceeded 2% in 10 years

The French 10-year rate jumped by almost 13 basis points during the session, exceeding 2% for the first time in more than eight years. At the beginning of the year, it was still moving at 0.20%.