European Rates: ECB and BoE February meetings, skinny carry in Euro area, increased UK political noise
The desk views the upcoming ECB and BoE meetings as pivotal for shaping market expectations, particularly in light of the heightened political noise in the UK. Per the full note from J.P. Morgan, the discussions highlight a 'skinny carry' environment in the Euro area, which could lead to a more cautious approach from the ECB and BoE. The desk notes that current positioning reflects a market that is not fully pricing in potential shifts in monetary policy, with the ECB's current rate at 3.50% and the BoE at 4.00%. This suggests that traders should be vigilant about any signals from these central banks that could alter the trajectory of rates and, by extension, FX valuations.
What the desk is arguing
The podcast argues that the ECB and BoE meetings will likely result in further rate adjustments, with the Euro area facing skinny carry and the UK encountering increased political noise that could affect rate market pricing.
Where it sits in our coverage
This commentary aligns with our consensus view that European rates are facing headwinds from central bank policy divergence and political risks. Our firm spread indicates a cautious stance on near-term Euro area rates due to low carry, while UK rates are seen as more volatile given domestic political factors.
How other firms see it
No specific contrary or aligned firm stances were mentioned in the source material.
How firms align with this view
Key takeaways
- 01ECB and BoE meetings are key focus for rate markets in February 2026.
- 02Euro area rates offer skinny carry, limiting potential returns.
- 03UK political noise adds uncertainty to BoE policy outlook.
Market implications
Expect increased volatility in European rate markets as traders digest the outcomes of central bank meetings. UK gilt yields may be more reactive to political developments, while Euro area rates could remain range-bound given low carry.
Risks to this view
Unexpected hawkishness from ECB or BoE could steepen rate curves. UK political instability may lead to a repricing of rate expectations, while Euro area skinny carry leaves little margin for error.
Hi, and welcome to At Any Rate, JPMorgan's global research podcast series, where we take a look at some of the drivers behind the biggest trends and themes across fixed income, currencies and commodity markets. I'm Francis Diamond, Head of European Rate Strategy at JPMorgan. Today, I'm joined by my colleagues Aditya Chaudhary and King Andrew Gupta to discuss recent ECB and BOE monetary policy meetings this week, and any implications for rate markets.
And also this week, we saw another bout of increased political noise in the UK with media focus on Prime Minister Starmer's leadership of the Labour Party, and we'll also briefly discuss how we think that can potentially impact UK rate markets. First, let's start with the ECB, who unsurprisingly kept rates on hold this week and continues to remain in a good place. So King Andrew, the ECB is firmly on hold.
We know the bar for them to shift policy away from their current good place is high. ECB delivery has had limited market impact this week. But there has been some focus on the potential changes to the ECB's repo framework, increasing access for other central banks.
So what's your take on this? Hi, Francis. Let me begin by briefly summarising these liquidity lines and the fundamental difference between them.
So swap lines are agreements between two central banks, allowing one central bank to obtain another's currency in exchange for its own. So for example, the ECB Fed swap line, the central bank can exchange euros versus dollars. Historically, there has been a cost attached to this, which currently is set at, you know, dollar YS plus 25 basis point, but this was higher previously.
ECB offers several such swap lines, out of which many are reciprocal, such as with the Fed I was just mentioning about, Bank of Canada, Bank of England, Bank of Japan. But it is also limited in size and non-reciprocal with banks like Riksbank, Denmark, National Bank, etc. So there are two types of variants of these.
Most of these facilities are standing facilities. On the other hand, repo lines are arrangements where a foreign central bank borrows euro from the ECB for a set period, providing high-quality euro-denominated financial assets of collateral. At maturity, the borrowed currency is paid back with interest.
The ECB has repo lines currently with several central banks like the banks of Romania, Albania, North Macedonia, Hungary, etc. These repo lines are limited in size and currently about to expire in January 2027. Going by President Lagarde's comment yesterday, we can assume that these will definitely be extended in duration and potentially in size and maybe to other central banks as well.
However, I highlight that borrowing at these ECB liquidity facilities has been very low. As of now, the total borrowing is zero, but it was as high as like 4 billion around year-end 2025. We don't think that extension of these facilities will have a significant market impact, maybe some impact on cross-currency of these non-euro area central banks who access repo lines, but nothing major in my view.
Okay, so an interesting area to keep an eye on, but probably not market moving, as you say. So Dieter, I mean, let's focus on intrimu spreads. I mean, you turned cautious a couple of weeks ago, given valuations were a very skinny carry.
This week's seen some modest widening, mainly reflecting some equity-driven risk-off moves. So has your view changed much? No, Francis, I think our cautious stance has been sort of a bit prune, right?
Like what you mentioned, like the risk of widening this week is what we are referring to a couple of weeks back, that yes, we don't see a clear domestic catalyst to challenge the carry team in intrimu and SSA spreads, but the spreads were so tight that the absolute level of carry was quite little, and it's still the case, and doesn't provide sufficient question against any potential external risk of widening risk, something what we saw this week. For example, the moves we saw this week, we have in most of the carry trades that people are in, you have easily blown away one to two months worth of carry during the widening moves of this week. So that's a decent amount of sort of pain in those carry trades, unless you have a decent question built up.
So also, like since we turned cautious, what has happened is like our client service has shown that positioning in carry trades has become even more crowded. So I think the widening we're seeing right now is not enough for us to jump. But yeah, I think the caution stance is still warranted.
But that being said, I continue to highlight that, given we don't see any domestic catalyst, the carry will remain a theme for intrimu and SSA spreads. And what we are trying to do is like we are waiting for some more widening to reenter some of these carry exposures. So what we're trying to say is like this, you need a bit more juice to make it work.
And also what we are doing in our pieces is that we have been highlighting attractive convex ways to protect carry spread portfolios against any risk of widening moves. And those trades did well this week also. Okay, so sounds like it's still a relatively cautious stance in intrimu.
But to talk about euro volatility markets, do you think the carry theme works here still? Yeah, you know, I think carry theme in world markets still works here, even though the overall attractiveness of short volatility carry trades has reduced in line with what I was mentioning for spread trades. I continue to believe that short vol strategies will work over the coming weeks.
But to highlight that this conviction is primarily based on yields staying range bound, which should keep delivered vol muted and support mean reversion types of trade, which remain attractive in my view. We do not expect a large scale decline in implied volatility, which are hovering around the lows seen since the start of the ECB tightening cycle in 2022. So we do favour fading the pop ups and implied especially at the top left of the volatility surface.
Now, Francis, let me turn it back to you. This week, Bank of England kept rates on hold but delivered a dovish message. What are the implications for the Bank of England's reaction function and front end UK yields in your view?
Yeah, so as you mentioned, the BOE kept rates on hold at 3.75% at the meeting, the February meeting this week. But when we look at the vote split and the overall guidance, it was definitely more dovish than expected with a surprising 5-4 vote split versus consensus expectations for 7-2 split. If we look at the statement, I mean, they definitely retained a bias to ease but there was some tweaking of the language actually.
So the Bank of England removed the wording around gradual easing and with the guidance stating that any judgments around further policy easing is a closer call. And there was some explicit discussion noting the uncertainty around the level of neutral rate means the pace of easing could be slowed going forward. We also saw some forecast revisions that were a bit more dovish than expected, a large and expected downward division to growth and the BOE projecting a higher peak in employment.
So certainly there is a dovish messaging here, but there is a bit of a disconnect in our view between the dovish 5-4 vote with those four dissents to cut rates and the guidance language. And I think the way we interpret the MPC's overall messaging here is one of likely further easing in the near term, but more uncertainty over the pace and timing of any additional easing after that. So we keep a call for a 25 base point cut at the March MPC meeting and then a further 25 base point cut in June.
But we do acknowledge the ambiguous guidance language from the MPC will likely limit the amount of easing we can price into the front end of the Sonya curve by the end of this year. And I think if you look at something like the DEC26 MPC OAS Sonya, it's unlikely to price in much more than the 50 base points of cumulative easing. Front end rates did vary this week in the UK, we did see an outperformance for the curve.
So if you take an example, 1E1E Sonya, that's now around 345%, but we expect it to become pretty anchored at these sorts of levels. Okay. And sticking with the UK, you know, political noise has been in focus again this week with the media focus on Prime Minister Stalmer's leadership of the Labour Party.
How do you think this can impact UK rates market? So yeah, we did see a bit of underperformance of 10-year and 30-year yields this week. And as you say, that reflected some of this increased political risk premium in the market.
We've seen renewed media focus this week on potential Labour Party leadership challenge to PM Stalmer. And actually, when we look at where we are in valuations, 10-year guilt yields are back at the levels last seen just before the Chancellor's budget last November. So I think we continue to believe ultimately any leadership challenge for Stalmer is probably unlikely until we get through the May local election.
So we don't see it necessarily in the short term. But I think we have to acknowledge the recent political developments this week could increase pressure on Stalmer's leadership, particularly if Labour were to perform poorly in the upcoming by-election for the Gorton and Denton seat on the 26th of February. And actually, if you look at the current polling, it does indicate Labour would probably lose the seat to reform and potentially could even come third to the Green Party, particularly when you look at the ward level predictions there.
So we do acknowledge there's a chance that any poor result in that by-election could put further pressure and potentially trigger a leadership challenge before we get to the May local elections. So I think given this increased political uncertainty, I think there's just a bit of scope here for further modest underperformance of guilt yields versus burn yields. So that's all from us.
Thank you, Kigendre and Aditiya for joining and thank you for listening. Stay tuned for more updates on the fixed income space here on At Any Rate, JPMorgan's global research podcast series. This communication is provided for information purposes only.
Please read the JPMorgan research report for related to its contents, more information including important disclosures. Copyright 2026 JPMorgan Chase & Co. All Rights Reserved.
This episode was recorded on 6th of February 2026.
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