Peter Goves (MFS) | This was as guided at the last meeting and is largely due to inflation projections being “too high for too long”. On QT, the policy was extended (again, as widely telegraphed) across all APP from July 2023. EGB spreads remain relatively tight and continue to exhibit relatively low volatility. There were minor changes to the forecasts which show medium term inflation at 2.2% (in 2025, +0.1ppt). As such, inflation is set to fall gradually to target and remain above target in the quarters ahead. This is likely to mean policy – and market – rates remain rangebound at prevailing levels until data show cuts can be brought meaningfully into the narrative. By the end of the press conference, core yields were little changed from when the press statement was first released – a fairly neutral market reaction.
In general, this had the look and feel of an interim meeting, another stepping stone to that elusive terminal rate. Indeed, Lagarde stated that “we will only know terminal when we get there”. That said, another hike in July is base case on the current information. Given that this is priced, this should not necessarily inspire another bout of market bearishness in our view. EGB spreads also remain resilient and the announcement of full QT from July has done little to change this.
