Countdown to the ECB meeting on Thursday 9 June with bond markets which in recent weeks have seen a new surge in yields. Yesterday the 10-year BTP reached 3.4% with the BTP / Bund spread in the 220 bp area.
L’record inflation (8.1% in May in the euro area) it is fueling the pressures for faster rate normalization and there are those in the ECB who are pushing for a more aggressive stance. “The ECB is ready to revise both forecasts and indications at its meeting on 9 June, after the latest rise in inflation has prompted even the most dovish policy makers to change positions. Investors expect the ECB to announce it early termination of net purchases under QEin view of the changes in monetary policy in July, which now seem to be done ”, he argues Pietro Baffico, European Economist by Abrdn.
The guidance should also indicate the exit from negative territory, but may not specify the pace of subsequent adjustments given the divergent views within the Governing Council. Recently, President Lagarde called for the next phase of policy normalization to be carefully calibrated, underlining the risk of an economic slowdown. A more rapid tightening cycle could instead be advocated by “hawkish” governors, whose reasons have gained ground – along with inflation – in recent months.
“The difference of opinion, the economic slowdown and the flexibility maintained by the ECB will likely translate into greater volatility in the interest rate and bond markets – asserts Baffico -. Lurking recession risks could also prompt investors to price different premiums for European bondscausing a widening of spreads and ultimately requiring the intervention of the ECB “.