The European Central Bank's change of position has shaken the financial market

The ECB's first monetary policy decision in 2022 released on Thursday kept the previous policy unchanged. The resolution only removed the word "two-way" from the expression of adjusting all monetary policy tools at any time. But the central bank acknowledged in its statement that the wider range of price increases for goods and services has heightened uncertainty about rising inflation. Since the last monetary policy meeting, the market-based measure of longer-term inflation expectations has been slightly below 2%; the survey-based measure of longer-term inflation is around 2%. This will further underpin key inflation, helping to stabilize headline inflation (previously "up to") its 2% target.

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The European Central Bank's statement has changed and shaken the financial market, and the suspense of raising interest rates is expected to be decided at the earliest meeting in March

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According to Friedrich Heinemann of the Centre for European Economic Research in Mannheim, the ECB's interest rate policy and asset purchases now appear to be outdated. The central bank is still pursuing policies to combat deflation. And the euro zone is experiencing the strongest inflation surge since the euro was born.

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In January, the consumer price index in the euro zone rose by 5.1% year-on-year, which not only set a new historical record, but also far exceeded the consensus of economists (4.4%).

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In response, European Central Bank President Christine Lagarde said on Thursday that the entire Council agreed that rising energy prices were a worrying factor, especially in the short term. But she also said that the European Central Bank stopped buying bonds or even raising interest rates, and will not curb the rise in energy prices. The current rise in energy prices is driven by factors other than monetary policy. This suggests that there is still debate over the pace of the ECB's accelerated monetary policy normalization.

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"We expect the ECB to correct its monetary policy stance at some point this year," said Jan Wiebig, chief investment officer at the Franco-German financial services group ODDOBHF.

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Lagarde said on Thursday that the ECB's decision would be based on data, in response to a question that investors were pricing in a rate hike. At her last monetary policy meeting, Lagarde also described a rate hike in 2022 as "very unlikely". Since then, she has repeatedly reiterated this view.

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Lagarde stressed on Thursday that flexible monetary policy is more important than ever given the "current uncertainty". This is seen by investors as the European Central Bank no longer rule out the possibility of raising interest rates this year.

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The sudden change in the ECB's stance caused a huge shock in financial markets. In the foreign exchange market, the exchange rate of the euro against the US dollar rose strongly, approaching the 1.1400 mark from around 1.1260 in more than an hour after the release of the ECB decision; the yields of government bonds in the euro zone countries also soared, among which the ten-year bond in Germany and Italy Treasury yields rose about 10 and 22 basis points, respectively. At the same time, the decline of the Western European stock market expanded significantly. The German benchmark Dax index and the European benchmark pan-European Stoxx 50 index both closed down more than 1.5%.

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Carsten Brizsky, head of macro research at ING, pointed out that the ECB's statement on Thursday reintroduced the "upside risk to the inflation outlook" that has not been used for many years. Lagarde also opened the door for a rate hike this year. The European Central Bank is expected to announce a full end of net asset purchases in September at its regular meeting as early as March, if energy prices do not plunge in the next four weeks. This will allow the European Central Bank to raise the deposit rate once at the end of the year.

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According to the latest statement from the European Central Bank, Jim Reid of Deutsche Bank also believes that the European Central Bank has given the green light to raise interest rates. Commerzbank now even expects two rate hikes this year, each by 0.25 percentage points.

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Indeed, the ECB is already stepping up its tapering of bond purchases. According to data released by the European Central Bank, as of the 28th, net purchases under the emergency asset purchase program PEPP in January were only more than 31 billion euros, while the net purchases in the previous month were about 49 billion euros (about 187 billion euros less than in November). billion euros). PEPP will end at the end of March.

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With the sharp drop in bond purchases, euro zone sovereign bond yields rose significantly. This week, the German 10-year bond yield (the benchmark for medium and long-term interest rates in the market) has remained positive for several days, which has not been seen since May 2019.

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Regarding the rise in market interest rates, the ECB believes that the financing costs of banks are still manageable. Lending rates for businesses and households continue to be historically low, and financing conditions for the economy remain favourable.