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ECB holds policy rate at 2.25% as energy shock keeps yields elevated

Ahead of the decision, markets pushed EMU bond yields to highs since the Iran conflict, with the 2-year swap earlier above 3% and French 10-year briefly topping 4%.

Reported · Written up by our desk · Central Banks

Action Forex said the run-up to the ECB policy decision saw a growing number of core euro area bond yield levels marked as “highest level since,” reflecting expectations for more aggressive tightening than markets had previously assumed to manage largely energy related supply shocks.

Ahead of the decision, the outlet noted that the 2-year EMU swap and Bund yield had earlier surpassed highs reached since the start of the Iran conflict. It pointed to the 2-year swap topping the 3% mark as a sign markets are increasingly weighing some form of higher for longer scenario unless energy prices ease.

Action Forex also highlighted rate pressure at longer maturities, noting that the “tipping point” to clear the post corona peak levels was hovering near the 5-year part of the curve, while the reference later lines up with periods such as 2011 and 2008. It added that the French 10-year yield briefly broke above 4% for the first time since 2009.

In the decision itself, the outlet said the ECB left its policy rate unchanged at 2.25%. Action Forex reported the bank stressed the volatile nature of current energy price moves while effectively acknowledging they are close to the baseline scenario from the June staff update.

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