PARIS (Reuters) – Thursday’s conference of the European Central Bank (ECB) was marked by the “hawkish” tone of its president, who will have to convince the markets that rates will remain high for longer than they anticipate, says Arnaud Guilhem Lamy, head of euro aggregate bond strategies at BNPPAM.

1 / What do you remember from Thursday’s conference?

Arnaud Guilhem Lamy – “The ECB raised its rates by 25 basis points (bps), as expected by observers. However, the speech of its president, Christine Lagarde, was clearly “hawkish” supported by revisions to projections Core inflation in 2024 has thus been revised upwards by 0.50 percentage point, while it remains above its target of 2% in 2025.

“Indeed, central bankers must now convince the markets that rates will remain high for longer than they anticipate: the question is less that of the terminal rate than of the duration for which it will be maintained. understand the statement by Christine Lagarde, who practically committed to raising rates again in July, an eventuality that was well anticipated by observers: convincing the markets to align their views with those of the central bank remains a challenge – the 2-year forward Ester (reflecting the key rate anticipated in two years by the markets) reaches 2.75%.The ECB should make more use of this new forward guidance to avoid expectations of falls rate.”

2 / Can the ECB bring inflation back to its target without impacting growth, as its economic projections indicate?

Arnaud Guilhem Lamy – “The ECB has placed great emphasis on the dynamism of the labor and wage markets, which it will seek to stabilize. This will not necessarily involve a recession: monetary policy can stifle demand without causing one, But at the cost of sluggish growth.Even the ECB’s projections show growth almost at its potential in 2024 and 2025. The delay with which rate hikes are transmitted to the economy should not be underestimated either. -this transmission should be apparent in the second half of the year.”

3 / Short-term rates are back at high levels: do prices fully factor in future rate increases?

Arnaud Guilhem Lamy – “Short rates are approaching a ceiling after having risen since March, and their prices include rates between 3.75% and 4.00% for the ECB. These are rather German rates at 5 years which may imperfectly reflect how long rates will remain high, which may still adjust upwards The 3% and 2.5% yield thresholds for German 2- and 10-year securities, respectively , are also callback levels towards which returns tend to fall after crossing them.

“Furthermore, the ECB has confirmed the continuation of its monetary tightening, well anticipated by the markets. Reimbursements of the TLTRO (Targeted Long Term Refinancing Operations, loans to banks in the euro zone) should therefore not have an impact on risk premiums.

(Comments collected by Corentin Chapron, edited by Blandine Hénault)

Copyright © 2023 Thomson Reuters