The European Central Bank raised rates for the first time in more than a decade on Thursday, boosting its benchmark interest rate by a half-percentage point.
At the same time, the central bank rolled out a new flexible bond-buying program it’s dubbing the Transmission Protection Instrument, or TPI.
The latter is an effort to smooth out the volatility triggered by the central bank’s shifting rate policy. And this rollout caused a bit of confusion in markets, with the euro spiking as high as 1.0281 per dollar before falling back to trade little-changed against the greenback.
All this leaving some investors to question the ECB’s seemingly contradictory actions.
"It actually makes no sense," said Matt Miskin, co-chief investment office at John Hancock Investment Management, said of the ECB's new policy approach.
"Quantitative easing is easing and raising rates is tightening. They’re basically trying to do two things at the same time, which doesn’t make a lot of sense," Miskin told Yahoo Finance Live in an interview. The TPI program is what’s referred to as "quantitative easing," an additional set of tools central banks use to loosen monetary policy.
ECB Chief Christine Lagarde said purchases using the so-called crisis tool will be of government debt only, and that the central bank will make them only when it deems it necessary.
"A decision by the Governing Council to activate the TPI will be based on a comprehensive assessment of market and transmission indicators, an evaluation of the eligibility criteria and a judgment that the activation of purchases under the TPI is proportionate to the achievement of the ECB’s primary objective," she said in a press conference.
Lagarde also declined to commit to usage of the TPI to shore up Italian bonds, which have been selling off after Mario Draghi resigned as prime minister. The Italian political crisis and the status of natural gas prices in Europe — in part dependent on the Russian-controlled Nord Stream II pipeline — still “dominate the outlook” for markets, wrote Krishna Guha, vice chairman at Evercore ISI, in a note reacting to the ECB decision.
That said, Guha wrote that the central bank’s new tools are a positive development: “With the TPI the ECB now has a more complete set of tools with which to manage rates and spreads."
Miskin, for his part, thinks that both the ECB and Federal Reserve will be forced to cut rates before long, as their focus switches to combating deteriorating economic growth. "We think they’re raising rates just to cut them again in the next six to 12 months," he said of the ECB.
As for the Fed, Miskin said: "Next year they’ll be dedicated to solving unemployment, not inflation, and we think that will be a huge pivot that will ripple across the bond market into 2023."