WOOD Flash – Europe macro: ECB – what was not said, but will be eventually

The ECB held an extraordinary meeting yesterday (15 June) and reiterated its commitment to fighting fragmentations, using flexibility in the reinvestment of PEPP, and confirming that committees will speed up the completion of the design for the anti-fragmentation instrument. The key question is what is the tolerable range for the 10-year sovereign yield for the ECB that can be an equilibrium between the inflation challenges, a tolerable interest rate level that does not put public debt in the Euro area in jeopardy unnecessarily, and allows the private sector to continue to invest in the green and digital transition? We believe that the range is 3-5%: the lower end for the core, higher credit countries and the upper range for the bigger debtors. This range reflects our core view that inflation will be higher this decade, at 4%, on average, in the Eurozone, where the risks lie to the upside if the stated policy goals are not achieved with efficacy.