The European Central Bank's (ECB) new interest rate hike yesterday by three quarters of a percentage point (75 bp) led to a much smaller or no increase in the euribor, to which floating loan rates are linked, while yields on 10-year Greek government and other eurozone bonds plunged.
The one-month euribor was negative on 1 July at -0.5%, the same as the ECB deposit rate was then. On 1 August, after the ECB rate had been raised to zero, the euribor was adjusted accordingly and became zero. After the second 75 bp increase in the ECB rate to 0.75% on 8 September, it rose to 0.7% and on 25 October it exceeded 1% with markets expecting another rate hike at the central bank meeting on Thursday. Yesterday, after the ECB raised its deposit rate to 1.5%, the one-month euribor rose less than 10bp to 1.10%. This development, according to analysts, mainly reflects the high liquidity in banks
The quarterly euribor, which embodies market expectations for the path of interest rates in the next quarter, was negative (-0.2%) on 1 July to rise to 0.25% on 1 August and climb to 1.58% on 25 October, and remained at the same level yesterday afternoon.
Greek government bond yields, which determine the country's borrowing costs, had begun to rise well before July, having been significantly affected by the decisions of the US Federal Reserve, which had been tightening its policy since March to deal with very high inflation.
In October, the yield on 10-year Greek bonds was hovering above 4% to just above 5%, with the spread (the difference) over the corresponding German bonds - which are considered the safest in the Eurozone - hovering around 2.5 percentage points, reflecting the country's risk.
Following yesterday's ECB announcements, the Greek 10-year yield tumbled 26 bps to 4.33% and the German 10-year by 16 bps to 1.95%. There are two reasons to explain the mismatch between the ECB's rate hike and the decline in bond yields.
First, compared to a year ago, the Greek 10-year yield is up 3.4 percentage points, while the German 10-year yield is up 2.1 percentage points. It would therefore appear that bond markets had discounted not only the last ECB rate hike but also the next one, and possibly the one after that.
Second, markets have changed course in recent days, following reports that the Fed will discuss in December to slow the pace of interest rate increases.
However, market expectations are volatile and the scene could change again if it appears that the ECB and the Fed will continue their aggressive policy of raising interest rates, which will depend mainly on the course of the battle against inflation. Both the ECB and the Fed have pledged that they will continue to tighten policy until inflation subsides significantly.
‘Akis Charalambidis
