Rate hikes continue – ECB raises rates by 0.75%

The ECB raised its key policy rate by 75bps from 0.75% to 1.59%, reaching its highest level since 2009.

The ECB also made changes to its reserve remuneration and TLTROs, creating incentives for banks to repay them early. This is a less hawkish tone than usual from the ECB, with no discussion of QT and adjusting the language of its guidance

The Euro area composite PMIs contracted further in October and are consistent with recession. All headline indicators are below 50, and forward-looking indicators tell us more decline is on the horizon.

In the UK, gilt yields declined sharply and have returned to the levels seen before the September mini budget as investors welcomed Rishi Sunak’s confirmation as the UK’s new (and third) Prime Minister this year. UK Chancellor, Jeremy Hunt, has delayed the date of his debt-cutting plan from October 31 to November 17.

The US 10-year yield declined on the week, falling back below 4%, driven by a mid-week rally related to the Bank of Canada’s unexpected decision to raise rates by 50bps instead of 75bps.

In the currency market, the dollar gained on the euro as markets interpreted the ECB meeting as dovish.