Peter Goves, MFS Investment Management | A historic decision and the end of an era. No more negative policy rates from the ECB following the bold 50bp hike at the July meeting. Clearly, the ECB remains focused on its primary mandate: price stability. The shift in guidance is interesting and makes the ECB much data dependent as an institution. In turn, it likely means short rates will retain their sensitive to inflation data in the months and quarters ahead. More hikes are likely as the ECB continues on its policy normalization path, to a more “neutral setting”.
What’s also instructive is that EGB spreads did not tighten following the publication of the new TPI. It is clear that the ECB does not and will not take a stance on political matters. In this sense, some spreads will likely remain guided by their own idiosyncratic backdrop but in another sense, the TPI does provide some generalized comfort to the EGB market overall in that there is now a new backstop for unwarranted, disorderly market behaviour under the conditions laid out.