LONDON, (Reuters) – The European Central Bank announced on Thursday that it would end a lengthy bond-buying scheme from July 1, and will signal a series of interest rate increases starting in July to combat stubbornly high inflation.

The ECB has decided to reverse the stimulus measures that it had been using for the past decade, as prices rose last month at an unprecedented 8.1%.

It is designed to keep rapid price increases from reaching the wider economy and perpetuating a wage-price spiral that’s difficult to break.

MARKET REACTION:

After the ECB’s decision, the euro fell briefly before rebounding. Money markets increased their bets on more tightening by the central bank until 2022. Benchmark German 10-year bonds yields reached new eight-year highs of 1.41%.

REACTION:

TD SECURITIES

The ECB “institutionalized dovishness” by essentially stating that it “intends” to hike 25bp in July. But the ECB was a bit more dovish than expected, opening up the possibility of a 50bp rise in September if the high inflation rate is maintained.

ANDREW KENNIGHAM, CHIEF EUROPE ECONOMIST, CAPITAL ECONOMICS:

Peripheral bonds are still vulnerable to sell-off if there is no further information about the possible backstop QE program.

The most important thing about this statement is not what it says. There is no new detail whatsoever about the putative “spread-fighting tool” which is intended to prevent peripheral spreads widening too far.”

All eyes will now be on the conference that begins at 13:00 BST (14.30 CET). We suspect she will be unable to provide more detail about a possible backstop programme which in turn means that investors are likely eventually to test the ECB’s resolve.”

BAS VAN GEFFEN SENIOR MACRO STRATEGIST RABOBANK

They did however add the caveat that they could consider a larger hike in September depending on how inflation is forecast. In other words, they will be focusing more attention on the revised projections three months later.

It does look more hawkish in the long-term, but that could explain why there is a market seesaw.

HETAL MEHTA, SENIOR EUROPEAN ECONOMIST, LEGAL & GENERAL INVESTMENT MANAGEMENT:

“The central bank will hope that it will not need to construct another programme to support Italy. Persistently low yields over the last eight years have allowed the Italian Treasury to refinance existing debt at lower funding costs, significantly reducing its debt servicing costs and making its high debt burden more manageable. Higher ECB interest rates and Italian borrowing costs call into question Italian debt sustainability.”

ANNA STUPNYTSKA – GLOBAL ECONOMIST FIDELITY INTERNATIONAL

We believe that it will prove difficult for the ECB, given its growth and fragmentation limitations and the fact that the tightening path to positive rates will be slower and less steep than the market pricing currently suggests. While a new spread management tool might help prevent spread fragmentation, it will not be a silver bullet as will likely bring a new set of issues for the ECB, including moral hazard.”

ROBERT ALSTER, CEO, CLOSE BROTHERS ASSET MANAGEMENT CIO:

“Holding rates at minus 0.5% despite record inflation, the ECB looks late to the party compared to the Fed. While the ECB may be participating in the hike-brigade’, it is not expected to take over the Fed. Rather, the ECB is simply following the US lead, and we do not expect more aggressive tightening whilst the war in Ukraine continues to weight on sentiment.”

SAM COOPER, VICE PRESIDENT OF MARKET RISK SOLUTIONS, SILICON VALLEY BANK:

“Euro direction will be dictated by the timing and the pace of future interest rate hikes beyond July, in particular any hints that we could observe increases in 0.50% installments rather than 0.25%. Focus will now turn to ECB President Lagarde at the upcoming press conference, any deviation from market expectations could send further shockwaves to the euro and the wider FX market.”

ARNE PETIMEZAS SENIORANALYSTS AFS GROUP AMSTERDAM

It is quite weak, I think. It’s not clear to me why negative rates aren’t ended in one day, July. Instead, they set July at 25bps. The same error is made when they forecast inflation at 25bps. This makes it very probable that the September inflation rate will rise to 50bps. Their’sustained,’ and “gradual” language suggests they expect to see higher hikes in 2023 than what is priced into OIS at the moment. They should be more aggressive in the immediate term than pushing for the future which, as everyone knows, is uncertain.