ECB's Lagarde believes the blog post on Monday (see analysis) was at a good time, adding we are clearly at a turning point, via Bloomberg; adds, we are not in a panic mode. When out of negative rates, you can be at or slightly above zero.

Rate Guidance:

• Rates are likely to be positive at end-Q3; when out of negative rates, you can be at or slightly above zero.


• Good reasons to believe that all three conditions (referencing the conditions for a hike) will be satisfied soon.


• Beleives gradualism is the way to go, as long as inflation expectations are anchored. Does not think we are in a situation of surging demand, inflation is still supply-driven.


• We are not behind the curve.

Economic Situation:

• The situation for the EZ is vastly different to the US.


• Looking carefully at all inflation expectations.


• Euro area is not in a recession.

FX:

• Does not comment on FX levels, when questioned about EUR/USD parity.

Reaction details (07:57)

In reaction to the remarks from Lagarde, specifically her comment that when out of negative rates, you can be at or slightly above zero, a hawkish reaction has been seen in Euro related assets, explicitly:

• 
  Bund Jun’22 fell from 153.33 to a test of the 153.00 mark; subsequently, dropped to a fresh session low of 152.83.


• 
  EUR/USD lifted from 1.0670 to a session high of 1.0694, before dipping marginally. Subsequently, extended above the 1.0700 mark.

Analysis details (07:51)

• Reminder, on Monday Lagarde, via a blog post, outlined the ECB’s policy plan saying that based on the current outlook we are likely to be in a position to exit negative rates by end-Q3. And, the next stage of normalisation will be guided by the medium-term inflation outlook; if inflation is stabilising at 2% over the medium-term, then a progressive further normalisation towards neutral will be appropriate.


• A policy plan that was followed by Bloomberg sources saying that Lagarde’s plan irked hawkish ECB members who want the possibility for a faster option, in reference to exiting negative rates at end-Q3, as such guidance implies two 25bp moves in July and September; thus, effectively ruling out a 50bp move. Reminder, on May 17th ECB’s Knot (Hawk) endorsed a 25bp hike in July but added that 50bp should not be excluded if data in the next few months suggests that inflation is broadening and accumulating.


• Note, Lagarde was asked about the 50bp issue multiple times in the interview, but generally avoided an explicit answer and referred back to the guidance provided in the blog post.

24 May 2022 - 07:50- Fixed IncomeImportant- Source: BBG TV