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Updated January 15th, 2024 at 22:25 IST

Euro zone yields rise after ECB rules out immediate rate cuts

Markets have been quick to bet the ECB hawks hinted lowering interest rates this year.

Business Desk
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ECB | Image:Unsplash
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ECB rate cut on cards: Euro zone government bond yields rose on Monday after European Central Bank officials said cutting interest rates too fast may prove self-defeating. Markets have been quick to bet the ECB will lower interest rates this year as inflation appears close to falling back towards target, but policymakers have urged caution and tried to downplay expectations.

The central bank's Chief Economist Philip Lane said in an interview with Italian daily Il Corriere della Sera published on Saturday that cutting rates too fast could fuel a new wave of inflation, forcing the ECB to then raise rates even more. "A false dawn, too rapid a recalibration, can be self-defeating," Lane said. ECB euro-short term interest rate (ESTR) forwards fully price the first move in April, with the chances of a cut in March at about 30 per cent.

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In total, markets are pricing in around 148 basis points (bps) of rate cuts this year from 155 bps late on Friday. "It's interesting to see one of the more dovish members of the governing council not overly dovish," said Anders Svendsen, chief analyst at Nordea, on Lane's comments. "The bigger picture will depend on incoming key figures and so far what we've got this year hasn't really been enough to change the narrative fundamentally," Svendsen added.

It is too soon to contemplate monetary easing or even the potential pace of such easing, ECB member Constantinos Herodotou, also seen as a dove, said in an interview with Econostream Media. Bundesbank president, Joachim Nagel, an outspoken hawk, agreed it was too early to discuss cutting rates because inflation remains high.

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Market participants label as hawks central bank officials who are inclined to advocate a tight monetary policy to control inflation, while doves are more focused on the economic growth and the labour market. "Lane’s interventions highlight that June remains the most likely date for the first rate cut," Citi analysts said. Other influential policymakers are expected to speak this week, including ECB President Christine Lagarde at the World Economic Forum in Davos on Wednesday, before the central bank enters its quiet period on Thursday before next week's meeting. Germany's 10-year yield, the benchmark for the euro zone, was last up 5.5 bps at 2.196%.

The country's policy-sensitive two-year yield was up 7 bps at 2.50 per cent. Heavy bond issuance, which so far has been well received, is set to moderate slightly this week, with auction volumes of about 27 billion euros expected. "As we have argued before, the supply impact starts to fade after the first week of January as the market already anticipates the heavy issuance," said Mohit Kumar, chief European economist at Jefferies.

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"Seasonality still remains positive fixed income till end January and any sell-offs are likely to be bought," Kumar added. Italy's 10-year bond yield, the benchmark for the euro zone periphery, rose 6 bps to 3.79 per cent, pushing the closely watched gap between Italian and German 10-year yields wider to around 158 bps. 

(With Reuters inputs) 

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Published January 15th, 2024 at 22:25 IST

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