As many central banks around the world are increasing interest rates to combat inflation, the European Central Bank (ECB) has yet to hike rates. The bank has indicated it will only raise interest rates when it stops its bond purchasing programmes in Q3 of 2022. A look into rep markets in general and the UK Sterling repo market specifically may provide insights into what participants in the market can expect when the ECB raises rates.
UK Sterling repo market may give insight into market conditions when the ECB raises rates, says Chris Farran of the CME Group.
The Bank of England has raised interest rates to combat inflation with four times since December of 2021. While rates for general collateral (GC) repo transactions in the UK sterling market have mirrored the bank rate since these increases began, the spread between general collateral and specific collateral (SC) have grown and have increased in volatility.
This increase in volatility between GC and SC spreads could mean that SC rates may be “sticky”, not moving along with the bank rate like GC rates.
Generally, repo funds rate trades are trading more negatively than they were at the beginning of 2012. This despite no changes in short-terms interest rates policy.