Rate: François Villeroy de Galhau calms the game

(Boursier.com) — François Villeroy de Galhau wants to calm the ardor of the market. The Governor of the Banque de France will warn against any risky forecast on the timing of the ECB rate hikes the day after Christine Lagarde’s more ‘hawkish’ than expected speech. The main takeaway from the Governing Council meeting this week is the commitment to keep options open as the pandemic stimulus is phased out, the European Central Bank member will say, according to remarks prepared for a a speech he is due to deliver at the Warwick economic summit.

“Faced with the growing uncertainty about inflation, our key word, as Christine Lagarde said, was ‘more than ever’ optionality”, said F. Villeroy, according to these remarks taken up by ‘Bloomberg’. “We take this seriously: we retain our full option on the decisions we will take from March and in the following quarters, informed then by the latest data, forecasts and geopolitical developments”.

The one who now chairs the Bank for International Settlements will clarify that while the ECB clearly sticks to its sequencing, it has a “complete option” on the pace and “when to move from one stage to another” : “if the direction of travel is clear, you should not rush into your schedule…”. During the press conference following the ECB meeting, Christine Lagarde did not reaffirm that a rate hike this year was “very unlikely”, leaving the door open for such a move in the eyes of investors and provoking a surge in bond rates. Taking these statements into account, eurozone money markets are now ‘pricing’ rate hikes of 50 basis points by the end of 2022, suggesting that the key rate will be cut to zero in December.

The ten-year German Bund rate, the benchmark within the euro zone, is currently taking 5.4 basis points 0.19%, a level it has not reached since March 2019. The yield on German bonds to five years (+7.8bp) has also just returned to positive territory for the first time in more than three years. The rate of the French 10-year OAT climbed for its part by 6.9 bp to 0.638%.