Janus Henderson Investors: ECB surprised the market

Janus Henderson Investors: ECB surprised the market

21 juli 2022

Rente ECB
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Andrew Mulliner, Head of Global Aggregate Strategies at Janus Henderson Investors, discusses the implications of the ECB’s decision to increase interest rates: 

'Negative rates are now history in Europe. The ECB surprised the market with a 50bp rate hike today as opposed to the 25bps it had previously indicated, whilst also announcing (as expected) a new anti-fragmentation tool, the Transmission Protection Instrument (TPI). The ECB qualified its larger than expected move by moderating its forward guidance for the September meeting, and stressing that this move was front loading rather than an incremental step up in hawkishness. The ECB also acknowledged the challenging environment they find themselves in, with higher inflationary pressure apparent but also a weaker growth environment. The combination indicates that the ECB is very aware that the path ahead for monetary policy is treacherous and also suggests that the rosy growth forecasts published by the ECB staff are also likely for the chopping block.

On the announcement of the TPI, details at the initial announcement were somewhat scant with the key points being that it is unlimited in size and its implementation will be fully at the discretion of the governing council. During the press conference and in the follow up press release, it was revealed that conditionality would be a factor, with several hurdles needing to be cleared prior to a decision to activate the TPI; at first blush, these conditions seem onerous, however studying the details suggests that the hurdle for inclusion is low. The vagueness of the trigger for activation means markets cannot explicitly test the tool, equally this clearly limits any immediate impact, however that is not that the point; this is not an active tool but a backstop. One surprising element of the announcement was that the ECB will look to offset any purchases with some kind of sterilisation to ensure the purchases don’t interfere with the monetary policy setting; this sterilisation is not just with regards to the level of liquidity in the system but also the aggregate size of the monetary policy debt security portfolio, indicating that the ECB could seek to reduce its allocation to core bonds as part of this program.

Whilst markets were initially surprised by the size of the move, the step away from the forward guidance for the September meeting acted to dampen the market response. The acknowledgement of the challenging growth outlook alongside the inflation outlook, marks a more nuanced take than perhaps has been notable from the ECB at prior press conferences. We should expect substantial negative revisions from the ECB staff at the next forecast round. The downside being that stagflation is a nightmarish environment for a central bank with responsibility for 19 different countries.'

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