PIMCO: ECB Reaction

Overall, yesterday’s ECB monetary policy decisions have been broadly in line with expectations.

The dovish market reaction is not entirely intuitive, and probably also influenced by the Fed and Bank of England meetings.

The ECB hiked policy rates by 50 basis points, and indicated there is more to come as underlying inflation remains at record highs.

The ECB intends to raise rates by another 50 basis points in March, and will then evaluate the subsequent path in light of the new March macroeconomic projections.

President Lagarde strongly suggested that the ECB will not be done in March.

The ECB didn’t provide much guidance regarding the potential interest rate destination, but mentioned that interest rates will still have to rise significantly at a steady pace, to levels that are sufficiently restrictive.

Our conviction remains low on pace and scope of ECB rate hikes, given the large uncertainties around inflation dynamics.

The ECB also released details on the APP QT exercise. In line with expectations, partial reinvestments will be conducted in line with current practice, proportionally to the share of redemptions across each constituent programme. We don’t see any market moving consequences as a result of those details.
Source: By Konstantin Veit, Portfolio Manager at PIMCO