Update on ECB monetary policy
📍 As expected, on Thursday, the ECB left interest rates on hold for the first time since June 2022 regardless of its view about a long-lasting high inflation environment. According to Lagarde, further hikes were not discussed during the meeting, but she definitely did not shut the door to higher rates either. As emerged during the press conference, past increases have helped to reduce demand and reduce inflation, so the ECB is determined to keep high rates for a sufficiently long period to bring inflation back to the 2% target.
📍 Lagarde also said that changes to the €1.7 trillion pandemic-era PEPP initiative were not discussed at this time. As a result, Italian bonds, major beneficiary of the program, outperformed in the market. Italy’s spread over Germany has been a hot topic during the conference, as it reached 210bps before Thursday and many investors were worried that it could finally lead to a rating cut to junk. During the press conference, the spread went down below the 200-bp threshold.