That’s what it does when hawks cry.
Markets are now pricing in interest rate hikes of up to 1.5 percentage points this year after the European Central Bank signaled the start of a hiking ‘trip’.
With inflation on the rise, ECB President Christine Lagarde left the door open for a 0.50pc rate hike in September, following a 0.25pc rise in July, saying the hikes would be ” progressive but sustained”.
Ms Lagarde tried to balance Dutch, Austrian and German hawks on the 25-member ECB governing council – who wanted a faster phase-out of bond purchases and bigger interest rate hikes – with Spanish, Italian and Greek doves looking to slow down.
Irishman Gabriel Makhlouf has generally been on the more accommodating side of the divide.
“Lagarde has shown his hawkish side,” said Pearse Conaty, head of euro rates at Bank of Ireland’s Corporate and Markets division.
“The biggest takeaway, I would say, is that 50 basis points is now the base case for September. I think every meeting the rest of the year will be a hiking meeting.
Everything will depend on the evolution of inflation, but it would have to slow considerably for rates to stop rising, analysts predict.
European Central Bank staff now forecast average eurozone inflation of 6.8% in 2022, a significant upward revision from their March forecast. Irish inflation hit 7.8pc in May, according to the Central Statistics Office, and 8.2pc as measured by the EU.
The ECB’s decision marks the end of the era of unconventional monetary policy, when rates were low and central bankers bought corporate and government bonds and banks were accused of having l money on deposit.
The ECB’s first rate hike in 11 years will be preceded by the end of its €40 billion-a-month asset purchase program, following the end of its €1.7 billion pandemic program. euros in March.
While the original bonds from both programs will be reinvested until 2024, ING analysts say the end of corporate purchases is “tipping credit to the edge of a precipice”.
“A different phase for credit has begun with a changing underlying rate environment and looming downside factors and risks, without the ECB to offer support,” said ING credit strategist Timothy Rahill and global head of sector research, Jeroen van den Broek.
The new normal will also hit Irish government bonds, although higher tax revenues and a booming economy mean government borrowing needs are lower than expected this year.
The National Treasury Management Agency even canceled a bond auction scheduled for yesterday because it was unnecessary.
“It will be more expensive [to borrow]’, said Mr Conaty, but ‘Ireland is not sticking here by any means. “
And the ECB has pledged to intervene with ‘new instruments’ if bond prices deviate – particularly in Italy, Greece or Spain – but that falls short of Mario Draghi’s 2012 pledge. no matter what”.
“I wouldn’t say it was an ‘all it takes’ but I think it was a great moment,” Mr Conaty said. “They’re the ones who pre-announce the first sustained hike cycle of the last decade.”