Renewed nervousness on the European government bond market

Posted on Sep 17, 2021 at 6:46 PM

It’s a little bomb that exploded Thursday night. According to two German analysts, quoted by the Financial Times, Philip Lane, the chief economist of the European Central Bank, told them the results of a long-term inflation estimate – a figure that the ECB does not communicate publicly. And this would foresee a return of inflation to the 2% target in 2025. Conclusion of the article, this would strengthen the chances of a first key rate hike from the central bank as early as 2023.

The ECB quickly denied the information with a statement deeming the article “inaccurate” Bank of Spain Governor Pablo Hernandez de Cos hammered the point home on Friday, saying the ECB was not planning a rate hike in 2023.

“In itself, the fact that the ECB plans to reach its inflation target is rather good news, after all the efforts it has made to achieve it,” said Frederik Ducrozet at Pictet for his part. But the forecast of a 2% price hike in 2025 would only be one of the criteria for deciding on a rate hike. And no one at the central bank wants to tighten like that over the next two years. “

Growing nervousness

But the damage is done. The information pushed the borrowing rates of states in the euro area to their highest in two months. That of the German 10-year Bund hit -0.27%. Its French equivalent, which has been going back and forth in positive territory in recent days, now seems to be well established above 0%, at 0.05%.

This new episode has fueled growing nervousness in a context that tends towards a general reduction in central bank intervention. The institution has instead multiplied encouraging signals for the economy. And in particular Christine Lagarde, its president. “The recovery is clearly underway, and probably stronger and faster than what we had expected six months ago,” she said Thursday in front of HEC students, estimating that thanks to the vaccination the levels of pre-covid growth could be regained before the end of the year.

Falcon victory

Several members of the ECB also said the sharp rise in prices could be more lasting than initially envisioned, saying the ECB would be ready to respond. The “five years in five years”, an indicator of inflation expectations on the market, is evolving at 1.75%, around its highest since 2018.

Faced with this improvement in the economy, the “doves” – the most moderate members of the central bank, are arguing for a long continuation of monetary support to accompany the recovery. “The” hawks “, for their part, would like to let the markets take this normalization into account, and therefore let the rates of government bonds rise naturally, analyzes Frederik Ducrozet. And it is this party which is in the process of regaining control. “

December meeting

This influence will be measured in December. The ECB will decide a priori to end its emergency pandemic program (PEPP) of 1.850 billion euros. And it will then have to decide if it changes the rules of its “classic” purchasing program (APP), much less flexible than the PEPP, and if it increases the monthly envelope. The objective is to be able to continue to buy the debts of European states in order to maintain favorable financing conditions for the economy. But the hawks have already expressed their opposition to these relaxations.

These prospects therefore worry investors who fear an early turn of the screw, as an echo to Jean-Claude Trichet’s decision to raise rates in 2011, before the crisis in the euro zone worsened.

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