Announcements
The ECB announced a 25bp hike in all reference rates today to leave the Deposit Facility rate, the Main Refinancing Operation rate and the Marginal Lending Facility rate at 3.755%, 4.25% and 4.50%, respectively. This decision is fully in line with our expectations
The ECB also announced that it will change the remuneration of the compulsory minimum reserves that banks hold at the ECB to 0% from the deposit facility rate so far applied. The aim of this decision is mainly to ensure the full pass-through of interest rate decisions to money markets and reduce the overall amount of interest that needs to be paid on reserves in order to adopt the appropriate stance. Given the volumes at stake, the market impact (repo, ESTR, Euribor, etc) should be virtually negligible.
Forward guidance
The ECB’s wording has changed from considering that more room must be allowed in its rates strategy (as it was in the past) to a context in which data will be the factor determining whether the additional room for rates tightening is still warranted; ii) this refers not only to the September meeting but also potentially for the meetings beyond.
Market reaction
The “still uncertain” scenario regarding where and when the terminal rate will end up is roughly in line with what the ESTR curves have been discounting recently, according to which the probability of an additional hike between September and December would stand at around 85%, and this view should still prevail. This would fairly match our own view that the chances of an extra (last) hike in the last part of 2023 is not less than 60%. However, the ECB’s insistence to recall the existence of potentially longer-lasting inflationary risk factors could also have a hawkish sway on mid-term expectations: the ESTR forward curve are setting the timing for the first rate cut in June 2024, which in our view may be a tad premature
Peripherals approach
The overall performance of peripherals vs. core paper was virtually unchanged during Mme. Lagarde’s press conference (with the BTP auction this morning weighed on the performance of Italian bonds). In the Q&A session, Mme. Lagarde denied that ECB has today discussed the possibility to assume additional decisions about the QT programme, recalling that ECB has already set a very ambitious liquidity reduction’s path.Once the ECB meeting was concluded, BTP and other peripherals performed better than the core countries, recovering yesterday’s spreads level and realigning peripheral spreads with the performance of the other riskier asset classes, in particular equity indexes and credit products