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ECB Interest Rate Decision

ECB Interest Rate Decision The ECB took a firm medium-term stance on QE in Dec-21. The PEPP (the Pandemic QE program) ends by March-22. But the APP (the old QE program) will run at EUR 40bn per month (vs. EUR 20bn currently) for Q2, EUR 30bn in Q3 and EUR 20bn in Q4. The ECB has been very firm that QE tapering comes before a potential rate hike. 

A rate hike in 2022 would simply either 1) A swifter tapering process (good luck) or 2). A rate hike while doing QE (very unlikely). But the market is still chasing at least 25-30 bps worth of hikes in 2022 already. 

 With QT (balance sheet drawdown) likely being launched by the Fed in Q2. Moreover, it will slowly but surely turn less expensive to short peripheral sovereign bonds in the Euro area. (Due to less collateral scarcity). And we have hence not seen the big test of the ECB yet. 

 All in all, I consider the only feasible path towards a rate hike in the Euro area a package of continued QE. While hiking towards 0%. This is clearly not an accepted fact as a potential path within the ECB. Hence, expect NO hikes in 2022 and EONIA/EURIBOR rates to drop back – pricing is out of scope with reality.

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ECB Interest Rate Decision