Hawkish surprise from the ECB

At its December meeting, the ECB hiked rates by 50bp, to 2.0% (deposit rate). The Bank delivered a very hawkish statement. Inflation remains the main concern and top priority.

The ECB foresees sticky inflation, with Eurozone inflation driven mostly by energy prices. Fiscal policy also plays a key role while supporting demand. In the short term, we see pressure on core sovereign bond rates and on peripheral spreads. We revised our terminal deposit rate in the current hiking cycle to 3.0% from 2.5%, with risks tilted to a possible further upgrade. Beyond the impact of domestic economic variables, European government bond yields are determined by the price of energy and fiscal and monetary policy choices:

  • On one side, risks of a prolonged recession pose downside risks to yields;
  • On the other, the combination of a new regime of higher energy prices and persistent expansionary fiscal policy could lead to a debt supply shock and persistent inflationary pressures.

You can now read the full whitepaper at the link below