Euribors slammed after hawkish ECB statement

Euribors slammed after hawkish ECB statement

The ECB has today hiked rates by 50bps to 2.50% as widely expected. However, the central bank also delivered a hawkish statement.

In the statement, the ECB says the decision to hike was “based on the substantial upward revision to the inflation outlook” and adds that interest rates will still have to “rise significantly” at a steady pace to reach levels that are "sufficiently restrictive" to ensure a timely return of inflation to the 2% medium-term target.

The immediate market reaction has been bearish and led by the front-end with red Euribors selling off up to 17bps.

Across the swap curve the price action remains volatile. The initial reaction has seen a slight underperformance of the 5y sector with last prices EUR 2y +9bp at 2.96%, EUR 5y +13bp at 2.79%, EUR 10y +10bp at 2.69% and EUR 30y +7.5bp at 2.08%.

Elsewhere, Bund asset swap spreads have been relatively stable and were last 1.5-2bps tighter.

In the ECB statement, the Governing Council goes on to stress the threat of inflation. It writes: “The Governing Council decided to raise interest rates today, and expects to raise them significantly further, because inflation remains far too high and is projected to stay above the target for too long”

At the same time, there has been an upward revision to inflation targets. It writes: “Amid exceptional uncertainty, Eurosystem staff have significantly revised up their inflation projections. They now see average inflation reaching 8.4% in 2022 before decreasing to 6.3% in 2023, with inflation expected to decline markedly over the course of the year. Inflation is then projected to average 3.4% in 2024 and 2.3% in 2025. Inflation excluding energy and food is projected to be 3.9% on average in 2022 and to rise to 4.2% in 2023, before falling to 2.8% in 2024 and 2.4% in 2025.”

With regard to QT, the ECB said it intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP until the end of February 2023. Subsequently, the APP portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of the second quarter of 2023 and its subsequent pace will be determined over time.

In bond markets, BTPs have underperformed with the 10y Bund/BTP spread widening by 12.5bps to 203.5bps last. 

For further details, please see ECB statement.