The European Central Bank raised its key policy interest rates by half a percentage point, lifting the deposit rate to 2.5%, and said it intended to deliver a similar rate rise in March because of underlying inflation pressures. It also gave details of how it will reduce its balance sheet. For corporate bonds, it plans to tilt reinvestments more strongly towards issuers with a better climate performance.
- The European Central Bank raised its key policy interest rates by half a percentage point, with the deposit rate rising to 2.5%. It also announced its intention of delivering another 50 basis point rate hike in March. We expect the deposit rate to peak at 3.5%.
- Green tilt: The ECB plans to tilt its corporate bond reinvestments more strongly towards issuers with better climate performance. This is symbolically important but its corporate bond holding is relatively small.
- Global monetary policy: There are strong similarities between the Fed, the ECB, and the Bank of England. All three say they are going to hike rates further but all remain data-dependent and aren’t pushing back against market expectations for the terminal rate.
- Investment implications: The ECB triggered a strong rally in bond markets with BTPs outperforming Bunds. The scale of the gains seems a little extreme to us. Credit is a good place to be.
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