(BFM Bourse) – The euro zone currency lost more than 0.7% against the dollar after the European Central Bank decided to raise its key rates by 75 basis points. Yields on sovereign bonds in the eurozone are easing for their part.
The determination displayed by the European Central Bank (ECB) and its president, Christine Lagarde, does not leave the market indifferent.
Following the central bank’s announcements, the euro accelerated its fall against the dollar and fell back briefly below parity. Around 4 p.m., the currency of the euro zone fell another 0.7% to 1.0014 dollars.
For their part, bond yields are easing. While they were trending up before the intervention of the central bank, the 10-year German sovereign debt rate dropped 8 basis points (0.08%) while the yield on the equivalent French Treasury bond ( OAT) also drops 9 basis points to 2.564%.
As anticipated by the market, the ECB raised all of its key rates by 75 basis points or 0.75%. But the work of the ECB “is far from complete,” said Jack Alleyn-Reynolds of Capital Economics, who expects other “aggressive” rate hikes in the months to come.
“We still have a long way to go,” acknowledged Christine Lagarde on this point during her press conference. The central banker said the ECB would decide in December on measures to reduce its balance sheet.
End of a “gift” to banks
In addition to announcements on key rates, the ECB has decided to tighten the conditions of its targeted loans (TLTRO) III granted at advantageous rates to banks to encourage them to lend to households and businesses.
These loans currently allow banks to benefit from a windfall effect. Clearly, the interest rates on these TLTRO III are lower than the ECB deposit rate. As a result, banks have an interest in holding onto these loans and placing them within the ECB, at deposit rates, for a gain.
This paradox is due to the fact that the ECB did not expect to have to raise its key rates so quickly when it implemented the conditions for these TLTRO III.
The central bank therefore corrected the situation. “The ECB’s change in TLTRO terms removes attractive arbitrage potential for banks, Jefferies analysts note.
According to Pictet Wealth Management, the TLTRO III borrowings of eurozone banks amount to approximately 2.1 trillion euros.
Julien Marion – ©2022 BFM Bourse