Shift in ECB stance poses risks to the bond market

Both we and the market are now discounting 100bp of ECB rate hikes by the end of 2023. And given the sequencing set out by Christine Lagarde, it seems likely that net asset purchases will end in Q3 this year at the latest. There are a number of reasons why the region is better placed to handle tighter monetary policy than it was in 2011, including lower debt servicing costs and the longer average maturity of government bonds. But peripheral spreads have widened markedly in the past few days, which will test the ECB’s tolerance for tighter financing conditions. The market reaction strengthens the case for the Bank to remain open to re-starting bond purchases even after it has started raising policy rates. Drop-In (10 February, 11:30 GMT): The Riksbank’s dovish stance looks increasingly untenable in a world of policy tightening, but how far will it go to embrace the hawkishness of its peers? David Oxley and Jonas Goltermann will be online to discuss the Swedish monetary policy outlook following the latest statement this Thursday. Registration details.