Germany issues ultimatum to EU bank chief – Eurozone facing major crisis

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With eurozone inflation stuck at record highs, ECB President Christine Lagarde last Thursday sent bond yields and rate hike bets surging by not repeating that a 2022 rate rise was very unlikely.

But comments from ECB officials including Lagarde on Monday and Tuesday suggesting a big tightening of monetary policy is not needed, and reaction since the bank’s policy meeting last week, appeared to provide some relief for markets.

However, the new head of Germany’s central bank, Joachim Nagel, is upping pressure on the ECB to take into consideration an increase in inflation rates this year and act swiftly.

He told Die Zeit: “The Bundesbank’s experts consider it likely that inflation will average well over four percent in Germany in 2022.

“If the picture does not change by March, I will advocate normalising monetary policy.

“In my assessment, the economic costs are significantly higher if we act too late than if we act early.

“Indeed, later we would have to raise interest rates more vigorously and at a higher pace.”

He added: “The first step is to end net bond purchases during 2022. Then interest rates could rise this year.”

On Wednesday, ECB board member Isabel Schnabel said interest rates may need to be raised if high energy prices risk pushing overall price growth expectations above the bank’s two percent target.

Late afternoon on Wednesday, Germany’s 10-year yield, the benchmark for the bloc, was down about 4 basis points to 0.228 percent.

READ MORE: European banking crisis: Industry facing ‘atomic bomb’

Germany’s five-year yield, which rose above 0 percent for the first time since 2018 on Friday was down 5 bps to -0.03 percent.

Italian and Greek bonds, the biggest beneficiaries of ECB stimulus, which had underperformed since the ECB meeting, also rallied. Bond yields move inversely to prices.

“I think to some extent the comments from (the ECB’s Francois) Villeroy and Lagarde… they’re doing a bit of backtracking when things have gone too crazy. That’s been the main thing behind this (rally),” said Jens Peter Sorensen, chief analyst at Danske Bank.

“It’s been pretty massive how much yields have risen. Even though (the ECB) have shifted, they got a lot more than what they had expected on the back of a meeting.”

The closely-watched Italian yield spread with German 10-year bonds, effectively the risk premium on Italian debt, was down a touch to 156 bps.

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Wednesday’s calm appeared to be tentative, however.

The drop in yields is small compared to the recent surge – Italian 10-year yields are up some 40 bps since the start of last week, for example.

Money market bets still imply around an 80 percent chance of a 10 bps ECB rate hike by June and a 90 percent chance of 50 bps of hikes by December, similar to Tuesday’s levels.

The primary market is also busy, with Spain receiving 60 billion euros of demand for a new 30-year bond in the eurozone’s first major government bond sale since the ECB’s hawkish turn.

Germany re-opened a 30-year bond and raised 1.266 billion euros. The auction was a technical failure with demand of 1.461 billion euros slightly below the 1.5 billion euro target.

Portugal re-opened bonds due in 2028 and 2031 to raise 1.25 billion euros at much higher yields compared to previous auctions.



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