The vice president of the European Central Bank, Luis de Guindos, basically confirmed this position in an interview yesterday. Starting to talk about rate cuts was premature, he argued. Although (general) inflation has reduced from more than 10% to 4.3%, the final stretch will be the most difficult. And he also noted that the rising oil price poses a potential challenge if it carries over to household and business inflation expectations. It is worth noting that, as far as market expectations are concerned, there has been some easing in longer-term inflation swaps. 5-year and 5-year inflation have fallen to the lowest levels since July.
While he also suggested that the ECB was happy with the level of interest rates it had reached, he alluded to ending pandemic emergency purchase program (PEPP) portfolio reinvestments as a next step. Although there has not been a formal debate in the Council, this “will come sooner or later.” But the ECB is aware of the support that flexible PEPP reinvestments still provide for sovereign spreads as a first line of defence, and the temporary widening of the key spread on 10-year Italian government bonds over Bunds to more than 200 basis points will have made ECB officials look higher up.
That said, Italian government bond spreads have recovered during yesterday’s session despite the overall rise in market rates, thus changing the recent directionality of the spread. The spread fell below 190 bps, adjusting nearly 6 bps compared to Friday’s close. One of the reasons cited is the good result of the sale of BTP Valore on its first day, which attracted demand of around €5 billion, suggesting that the total size could increase to €15 billion over the course of the year. of the next few days.
