ECB hikes by 25bps to 4% after knife-edge decision

ECB hikes after knife-edge decision

The ECB has hiked interest rates by 25bps, taking the deposit rate to 4.00% following a knife-edge decision that could have gone either way. The Bloomberg consensus was for no change at 3.75%.

“Inflation continues to decline but is still expected to remain too high for too long,” the ECB states.

ECB €STR forwards for the Dec23 peak are higher at 3.95% (+4bps) versus an new €STR level of around 3.90% but Sep24 is 2bps lower at 3.46% following today's move.  

The euro swap curve has bull-flattened across 2s/10s at -60bps (-2bps) while 10s/30s has seen a steepening up to -33.5bps (+3bps). BTPs are outperforming Bunds by around 3bps in 10y.

Meanwhile, markets remain volatile as ECB President Lagarde begins the press conference with stronger-than-expected US retail sales and PPI data in the mix. In contrast, euro implied vol is 4.9nvol softer in 1m10y, 3.3nvol lower in 3m10y and 5.4nvol softer in 1y1y following the decision and the suggestion in the statement that rates are now on hold/at a peak. 

In its statement, the bank adds that “interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”

The ECB pledged to continue to follow “a data-dependent approach to determining the appropriate level and duration of restriction” and adds future decisions will be based on “assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.”   

With regard to QT, the APP portfolio will decline at a “measured and predictable pace” while the PEPP proceeds will be reinvested “until at least the end of 2024”.

 
As for the TLTRO, the ECB said it will “regularly assess” how targeted lending operations and their ongoing repayment are contributing to its monetary policy stance.