On Thursday, southern Europe recorded an increase in bond yields after a series of interest rate hikes were promised by the European Central Bank (ECB), which will start from July. The goal of tightening the monetary policy is to keep the soaring inflation in check. With the ECB confirming that it was putting an end to its bond buying program that it had used for adding monetary stimulus during the pandemic, there was a decline in European stocks. According to policymakers, there will be a hike of 25 basis points in July and there may be another increase in September by a bigger margin.
Money markets have already priced in the interest rate hikes from the ECB and are now considering that there may be an increase of 145 basis points made in this year alone. The last time the ECB had given interest rates a boost had been in 2011. There was a 24 basis point increase in the Italian bond yields for the day and this makes them the highest they have been since 2018. Likewise, there was an increase in German bond yields as well, and they grew to 1.47%, which is the highest level that has been recorded since July 2014.
Previously, they had been around 1.37% and there was also a 7 basis points increase in two-year bond yields, which brought them to 0.78%. The euro had initially risen in volatile trading, but had later dropped sharply as traders were struggling to figure out if the ECB really had a hawkish stance or not. Meanwhile, the dollar recorded a sharp rebound in the market. Market analysts thought that the statement from the ECB was a way of catching up with the other global central banks that have already hiked up interest rates significantly.
Some economists said that the ECB had finally turned hawkish and they were now saying that the interest rate would get significantly higher in the next couple of quarters. While the president of the ECB, Christine Lagarde had talked about doing things gradually, analysts do not really agree and said that the forecasts made by the bank indicate that their rate hikes are going to be quite aggressive. Some also predicted that considering the reducing economic growth and with the Ukraine and Russia conflict, the ECB would not be able to move as aggressively as it may want.
There were analysts who said that the ECB would find it difficult to move the rates into the positive territory so fast and the tightening path would probably be shorter and less steep than what the market had priced in. This is somewhat because of a few weaker states of the euro zone, such as Greece and Italy, because their borrowing costs have gone up. The bond yields in Italy were set to increase for their biggest gain in a single day since late March. Meanwhile, a 4.15% increase was recorded in Greek bond yields and this brought them to their highest level since 2020.