One of the arguments – there are others – I and other commentators made against the ECB’s two rate hikes (here, here and here) was that it would significantly worsen the outlook for the already struggling peripheral euro area countries. A simple chart (source) shows just how justified this fear was:
Bond spreads had been on a slowly declining trajectory since the start of the year, declining quite markedly in the month prior to the ECB decision. Spreads rose sharply immediately after the announcement of higher rates on 13 April and, more importantly, have since been on a persistent upward trend. The second hike had a similar effect. This is not to say that the only cause of the shift was monetary policy, of course. But note also the sharp downward trend in Spanish and Italian spreads at the end: this followed the ECBs decision to buy these bonds, in an effective policy U-turn.
Sigh! Economics really isn’t rocket science. But still too hard for the ECB, it seems.