Banking

ECB schedules emergency meeting

The unscheduled meeting is driving speculation the bank will announce a new tool in order to tackle the rising borrowing costs in the weaker economies within the Eurozone and avoid another debt-crisis, according to the Financial Times.

An ECB spokesperson told Investment Week: “The Governing Council will have an ad-hoc meeting on Wednesday to discuss current market conditions”.

The meeting comes just a week after the ECB announced it would raise interest rates by 0.25% next month with further raises expected late in the year.

It had also announced it would extend its bond-buying stimulus programme on 1 July.

News of the ECB’s impromptu meeting is already causing markets to react, as Italy’s 10-year bond yield fell 20bps to 4%. Spanish, Greek and Portuguese bond yields were also down.

US investors remain pessimistic as focus tightens on Federal Reserve

The announced meeting brought yields down from earlier in the week, when Italy and Greece’s 10-year bond yields had risen above 4%, and Italy’s had reached its highest level since 2014, while Spain’s had risen above 3%.

The difference between the yields on the Italian and German 10-year government bonds, an indicator of stress in European bond markets, had reached 2.4% – the highest since mid-2020.

Katharine Neiss, chief European economist at PGIM Fixed Income, commented on the current economic situation: “As interest rates rise, so does the risk the eurozone might fragment. Market participants are used to the ECB dealing with this risk against a backdrop of low inflation and easy monetary policy. But this time peripheral spreads are widening as financial conditions tighten.

“The ECB has not convinced investors it has a plan to deal with fragmentation risk as financial conditions tighten. Worse, the ECB suggested tighter financial conditions are desirable to reduce what it sees as excessive valuations in certain asset markets.”

Investor expectation were already high with aggressive interest rate moves expected in the US ahead of the Federal Reserve meeting.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: ‘’Financial markets have been beset with shivers of anticipation of more aggressive interest rate moves, and as the clock ticks down to the key Federal Reserve meeting later, nerves are set to stay frayed.”

 

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