di Konstantin Veit, Portfolio Manager di PIMCO
The ECB hiked policy rates by 50 basis points, and indicated there is more to come.
The ECB didn’t provide much guidance regarding the potential interest rate destination, but mentioned that interest rates will still have to rise significantly, to levels that are sufficiently restrictive.
The ECB communicated that the pre-meeting market pricing of a 3% terminal rate is not judged sufficiently restrictive at this stage, and should be revised higher.
Our conviction remains low on pace and scope of ECB rate hikes, given the large uncertainties around inflation dynamics. The market is currently pricing a terminal rate of around 3.25%, which doesn’t seem unreasonable after the hawkish delivery today.
The ECB also released broad quantitative tightening (QT) principles, with details to follow at its February meeting. Initial run off of its APP reinvestments will be around 50% of the maturing securities from March onwards.
Interest rates will continue to serve as the main policy instrument, the tools for safeguarding the orderly transmission of monetary policy will remain in place, and QT will focus on a gradual and orderly passive reduction of APP reinvestments over time.
We believe the institutional Euro area setup suggests limited scope for the ECB to entertain trade-offs between QT and policy rates, arguing for any bond holding reduction exercise to essentially take the shape of a background programme.
In our baseline, we expect the passive APP run off to continue at a 50% reinvestment pace beyond Q2 next year.
The ECB have judged inflation to remain above target for the entire projection horizon. The new staff macroeconomic projections foresee 2024 inflation at 3.4%, while the inaugural 2025 inflation projections at 2.3% are closer to the ECB’s 2% price stability objective.