Market volatility has been on an upward trajectory over recent weeks. The European Central Bank raised all three key interest rates by 75 basis points each to contain the soaring inflation.
Marilyn Watson, head of global fundamental fixed income strategy at BlackRock, commented on the ECB decision: “Volatility in financial markets showed no sign of abating in recent weeks, as the significant range of risk factors and uncertainties facing investors remained in focus.
“These include high inflation, monetary policy tightening cycles and the withdrawal of liquidity by numerous central banks, shifting growth outlooks for various economies, political and geopolitical events and a multitude of factors stemming from ongoing consequences relating to the COVID-19 pandemic, to name but a few”.
The ECB decision did not come as a surprise to investors and the central bank “amended its language around forward guidance in the official statement, signalling that further tightening is to be expected but on a meeting-by-meeting approach”.
Further noting the European bank’s decision, Marilyn said that the bank did not reveal its measures “around the prospect of quantitative tightening.”
However, it is pertinent to note that the bank Governing Council disclosed interest rate changes applied to its targeted longer-term refinancing operations (TLTRO III).
The bank also revealed that minimum reserves held by credit institutions would receive the deposit rate, not the refinancing rate, in order to “free up collateral and reduce liquidity”.
Marilyn also drew attention to the two awaiting monetary policies from the Bank of England and the US Federal Reserve (Fed) on November 3 and November 2, respectively.
During the uncertain market conditions and elevating volatility, “we believe it is vital to focus on robust risk management with an emphasis on stress testing and deep analysis of liquidity, correlations and genuine portfolio diversification”, Watson remarked.
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