Short-dated euro zone borrowing costs hit multi-year highs on Tuesday after Federal Reserve Chair Jerome Powell opened the door to more aggressive interest rate hikes in his semi-annual monetary policy testimony to Congress.
"If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,"
Powell told the U.S. Senate Banking Committee
, indicating that the Fed could raise rates by 50 basis
points (bps) this month, after downshifting to a
quarter-percentage-point rate hike at the previous meeting.
Germany's 2-year government bond yield , most sensitive to changes in policy rates expectations, hit its highest level since October 2008 at 3.337% after Powell's remarks were published.
Italy's 2-year yield was up 3 bps to 3.888%, hitting its highest level since 2012, having earlier dropped as much as 10 bps before Powell's testimony. "Powell has poured cold water on the idea that the Fed is ready to change tack, and reiterated the need for bigger interest rate rises if they are required," said Richard Carter, head of fixed interest research at Quilter Cheviot. "Ultimately, when the Fed speaks, other central banks sit up and listen. As such, Powell's comments today are likely to reinforce concerns over hawkish central banks especially on the back of recent comments from ECB officials talking about their appetite for more interest rate hikes," Carter added.
Austrian central bank chief Robert Holzmann advocated on Monday four European Central Bank steps that would take the deposit rate to 4.5%, boosting bond yields, while ECB President Christine Lagarde said on Sunday that a 50-basis-point hike in March was "very, very likely".
"The ECB doesn't have a ceiling, but an inflation target of 2%," she said when asked about the prospect of an ECB policy rate of 4% or above and a possible ECB ceiling to rate hikes.
"Just like the U.S., further rate rises than were
potentially expected will be on the table for as long as
inflation persists and economies can handle it," Quilter's
Carter said.
"For Europe, the outcome of this is likely yields elevated for longer and potentially further inverted yield curves," Carter added.
RATE PEAK UPGRADES Market participants have continued to upgrade their expectations about the ECB policy rate peak. Citigroup expects the central bank to push its deposit rate to about 4% by July. "This policy is more likely to result in (voluntary) overtightening of rates followed by a correction than to a long plateau," a Citi research note said. The November 2023 ECB euro short-term rate forward was at 4.027% , implying expectations for a depo rate at around 4.127% by year-end. Nomura economists raised their terminal depo rate forecast from 3.50%, a view they had held since October 2022, to 4.25%. "We continue to see eventual cuts but have pushed the timing of the first cut back to Q4 2024," a Nomura research note said. "We expect the ECB to lower rates back to 2.75% by mid-2025." Germany's 10-year yield , the benchmark for the euro area, was last down 3 bps at 2.7%, having earlier been lower by as much as 8 basis points.
Italy's 10-year bond yield was little changed at 4.551%, having earlier fallen as much as 11 bps.
The spread between Italian and German 10-year yields widened to around 184 bps. (Reporting by Stefano Rebaudo and Samuel Indyk; Editing by Bernadette Baum and Paul Simao)
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