The yield of the Bund, Germany’s 10-year government bond, rose to 2.7% and reached its highest point last month, due to the hawkish statements of European Central Bank (ECB) officials. There are different views among ECB policymakers regarding the interest rate hike.
Different voices from the ECB
ECB’s Peter Kazimir emphasized on Monday that policymakers need until March to confirm that no further interest rate hikes will be made. Kazimir said, “We will make a new evaluation in March. “I think we don’t need any further interest rate hikes right now,” he said.
On the other hand, Bostjan Vasle and Robert Holzmann, representatives of the ECB in Slovenia and Austria, signaled the possibility of additional interest rate increases. While Vasle said, “We want to ensure an appropriate monetary policy stance so that inflation approaches our target in the medium term,” Holzmann said, “We must be very careful about the timing of the interest rate increase.”
European government bond yields fall
European government bond yields fell last week following the ECB’s decision to impose an additional 25 basis point rate hike. ECB President Christine Lagarde said that the interest rate increase was made to support inflation. However, she signaled that tightening monetary policy was a potential outcome due to falling inflation and signs of economic weakening.
The yield on Germany’s 10-year Bund rose to 2.7% on Monday, its highest level since September. In contrast, the yield on the French 10-year OAT fell to 1.8%. The yield of the Italian 10-year BTP remained constant at 2.3%.
Market expectations
While market participants are uncertain about whether the ECB will continue to raise interest rates in the coming months, they think that the yield of the German 10-year Bund may rise further. Commerzbank analyst Christoph Rieger said, “The ECB’s hawkish stance exceeded the markets’ expectations. “It is possible for the German 10-year Bund’s yield to reach 3%,” he said.
On the other hand, some analysts predict that the ECB may stop or reverse the interest rate increase. ING analyst Carsten Brzeski said, “The ECB’s decision to increase interest rates increases the risk that economic growth will remain weak despite rising inflation. “The ECB may postpone or reverse the interest rate increase,” he said.
