ECB hikes 50bps and says another 50bps in March; Big Bund rally

ECB confirms 50bps March hike; APP details

The ECB has today hiked rates by 50bps to 3.00%, as widely expected. The Governing Council also gave firm forward guidance by stating that it plans to raise rates by another 50bps at the 16 March meeting. See here.

It said little definite about the longer term outlook for policy, other than stressing data-dependency. The ECB aims to "stay the course in raising rates significantly at a steady pace” to ensure a “timely return” to 2% medium-term inflation target.

On the APP, it will decline by €15bn per month from the beginning of March to the end of June 2023 “and the subsequent pace of portfolio reduction will be determined over time.” Further details on the modalities for reducing APP holdings will be published in a separate statement at 15:45 CET. 

Before the ECB announcement at 14:15 CET, the more dovish-than-expected overnight Fed and then BOE meetings saw the Bund future rally up to 122 ticks. Since the ECB announcement, the Bund has rallied further and was last up around 185 ticks. The BTP is more than 2.5 points stronger.

Some sources expressed surprise at the extent of the post-ECB rally. “Yes, it is surprising. But there was room to catch up with the UST rally I suppose,” said one.

Across the swap curve the price action remains volatile. Last prices were EUR 2y at 3.20% (-10bps), 5y at 2.77% (-15bps), 10y at 2.71% (-14bps) and 30y at 2.24% (-8bps). Euro implied volatility has been hit with 1m10y down 7nvol and 3m10y 4nvol softer. EUR 5y5y inflation swaps are little changed around 2.30% while the inflation curve has steepened.

Elsewhere, Bund asset swap spreads have widened, led by the front-end of the curve. Last prices vs 6mE were Schatz at 69.2bps (2.8bp), Bobl at 65.3bps (+1.4bp), Bund at 61.8bps (+0.6bp) and Buxl at 28.3bps (+0.9bp).

ECB President Lagarde is due to begin speaking at the press conference at 14:45 CET.