This is the question of the moment…
(Boursier.com) — Still no decline for the Paris market, which is moving around equilibrium at midday the day after the highly anticipated announcements from the ECB. Unsurprisingly, the European Institution raised its three key rates by half a point and explicitly announced at least one increase of the same magnitude next month, reaffirming that it would stay the course in its fight against inflation. But the market nevertheless took these announcements as accommodating. As the Bank of America teams explain, “we had at most three dovish snippets.”
First, Christine Lagarde said that short-term inflation risks are more balanced. Second, she argued that the intention to raise policy rates by 50 basis points in March is not a 100% commitment. And third, she didn’t give specific direction beyond March. Is this for all that a ‘dovish’ discourse, wonders BoA. The strategists of the American bank clearly think not.
First of all, the economy’s resilience points to stronger core inflation risks over time. So does the focus on wage growth and, more importantly, the need for fiscal policy to start easing measures now. C.Lagarde added that the disinflationary process has not started. Also, after stating that the intention is not 100% commitment, she added that under all reasonable scenarios, a 50 basis point hike is likely in March.
So, according to BoA, given the emphasis on data dependency, the message couldn’t get any more hawkish than this. In addition to the hawkish depiction of the outlook from December, the underlying policy message was quite powerful. Yes, there are no definite indications of what they might think after March (note: the governors), but the ECB has delivered a 50 basis point hike, with a firm promise of 50 basis points further and a clear reference that March will not be the peak in rates but will be the month in which, with a new set of forecasts, the pace will be reassessed. And the rates will have to remain at the terminal level for a long time.
Vincent Chaigneau, Research Director of Generali Investments, also believes that the message is far from ‘dovish’. The ECB will stay the course and keep key rates at a high level for a long time.” During the press conference following the ECB’s monetary policy decision, President Christine Lagarde once again adopted a hawkish tone, according to him. She made it clear that further hikes would be needed beyond March as there is “some way to go” and that rates should be kept tight enough to ensure inflation returns to target. “We continue to expect another 50 basis point hike in March, followed by two more 25 basis point hikes in the second quarter of 2023, which would take the deposit rate to 3.5%. This forecast is in contradiction with the markets which have revised their expectations somewhat downwards and envisage a peak at 3.4%”.
For Konstantin Veit, portfolio manager at PIMCO, “Overall, the monetary policy decisions taken yesterday by the ECB came out largely in line with expectations. The dovish reaction of the market is not the immediate consequence of this decision and it was probably influenced by the Fed and Bank of England meetings.”
Same story with Garet Jandrell, manager in the Public Fixed Income M&G team. According to him, “one can think that the ECB is still on a hawkish trajectory. The markets understood it differently, reacting as if the ECB had just announced a cut in rates, with a strong rally in eurozone bonds and The market is desperately awaiting a sign that the ECB will soon begin to ease the pace of its monetary tightening, so part of the Dovish reaction may be a matter of positioning. he balance between inflation and growth risks has also given bond investors confidence. However, this recovery seems premature, headline inflation remains very far from the target, core inflation has not yet experienced a significant decline , but it can also surprise on the upside, as we have seen recently in Spain”.