He The ECB announced a moderate increase of 25 basis points – and, leaving aside a more mechanical increase in initial interest rates, the rest of the curve recovered. The decision was supported by a “solid majority” of the Council.
The first reason for that reaction was that the ECB basically said that it had reached the terminal rate. The ECB adds the caveat that this applies given the current assessment of all data and data dependency could still mean rates will rise; President Lagarde added that it cannot be said that key rates have reached their maximum. In fact, markets are also pricing in the extreme risks of another rally in the coming months. But for all practical purposes, the ECB no longer has a bias on rates and we are at the peak as long as there are no major surprises in the underlying scenario.
The other reason the curve is flattening is that the ECB offered nothing to support longer-term rates. As Lagarde noted during the press conference, at no time was either the direct sale of assets from the asset purchase program or the shortening of the reinvestment period of the pandemic emergency purchase program discussed. Riskier assets reacted with relief, in particular Italian government bond spreads over German Bunds saw a considerable tightening and the key 10-year spread narrowed by more than 4 basis points. That still leaves it somewhat wider compared to the end of last week, as the Italian government’s growing budget deficits have come under increased scrutiny. Increasing risks remain, but at least the ECB is not adding to those concerns for now.