Last week two-year German yields rose at a pace not seen in years, corporate spreads widened and rates volatility received a kickstart. Now peripheral yields are screaming higher. In effect financial conditions have tightened, contrary to the European Central Bank’s avowed intentions.
While the ECB’s statement from its first policy review of the year largely reiterated the December guidance, President Christine Lagarde uncorked the genie by refusing to rule out a rate increase in her post-review remarks. It wasn’t as though she didn’t throw in sufficient disclaimers: “Don’t assume...immediacy, don’t assume too much.” Or that the ECB “will be faithful to sequencing.” Or even “we are not seeing wage increases as the market sees, we don’t see inflation spiraling.” And don’t forget, “we are not here to rock the boat.”
