After the European Central Bank kept interest rates at the same level late last week, investment managers discuss the impact.

The European Central Bank kept interest rates at the same level on Thursday last week, following 10 consecutive hikes to a high of 4 per cent to combat inflation, despite concerns over risks to inflation from the Israel-Hamas war.

The war in the Middle East has threatened to raise oil prices, which would impact Europe as it is heavily dependent on imported energy, although there hasn’t been a major spike or supply disruption so far.

The ECB's decision comes after eurozone inflation dropped to 4.3 per cent in September from 5.2 per cent in August – its lowest level since 2021 – according to estimates from the EU statistics agency Eurostat. The figures suggest that efforts to curb inflation in the zone are paying off. Core inflation, which excludes volatile fuels and food prices, fell by more than analysts expected to 4.5 per cent from 5.3 per cent. The target level is 2 per cent. See more here.

The ECB’s decision is in line with other central banks around the world, which are thought to have reached or are on the brink of peak interest rates.

ECB president Christine Lagarde reiterated on Thursday that high interest rates would help to bring back inflation to the bank’s goal of 2 per cent if maintained for a sufficiently long duration. She also did not rule out further rate hikes.

Here are some reactions from investment managers to the hike.

Daniele Antonucci, chief investment officer at Quintet Private Bank (parent of Brown Shipley)
“Today’s ECB decision confirmed our view that interest rates are likely to have reached a plateau. Inflation is still expected to stay elevated, but it dropped further lately, and most gauges of underlying inflation have continued to ease.

“At the same time, it’s also becoming more evident that the economy is slowing. We expect a mild recession in the euro area over the coming months. These two dynamics, slowly declining inflation but still above target and weakening economic activity, suggest that we’re at peak rates. But, as the inflation battle isn’t fully won yet, we expect the ECB to keep rates restrictive for some time to ensure there’s no inflation resurgence.

“The monetary policy outlook is somewhat more uncertain for the Fed. Today’s strong and above-consensus GDP growth numbers, the strength of the US job market, along with an inflation path that’s moderating more slowly than expected, appear to have raised market odds of a further Fed rate hike. This has always been our base. But we also think that we shouldn’t be carried away with the narrative of higher rates for longer. We think we’re close to peak rates. This is because the recent spike in bond yields does tighten financial conditions and, therefore, is likely to substitute for rate hikes.”

Neil Birrell, chief investment officer at Premier Miton Investors
“The ECB left rates on hold for the first time in over a year, which was no surprise. It is clearly of the view that keeping rates at this level for long enough will do the job of getting inflation back down to its 2 per cent target. It seems that the ECB is aligned with the Fed and Bank of England in its view and will also stand ready to act further if it needs to, but it has no option but to say that. It’s too early to think about rate cuts, but they are moving up the agenda.”

Marc Schartz, portfolio manager at Janus Henderson Investors
“After 10 back-to-back hikes, the ECB delivered no change in policy rates at today’s meeting. Slowing core inflation suggests that monetary tightening is impacting the real economy and hence today’s decision comes as no surprise to the market. However, with inflation remaining resilient in several pockets of the economy, the mantra of “higher for longer” rates is likely to be with us for some time. At this stage of the rate cycle, the ECB’s monetary tightening approach is likely to shift from pure rate setting to more direct balance sheet management actions, i.e. technical measures to absorb excess liquidity created during the QE times. However, no further details were communicated today on potential actions such as an increase in banks’ reserve requirements or a tempering of re-investment rates related to prior QE programmes.”

Rufaro Chiriseri, head of fixed income for the British Isles at RBC Wealth Management
"As widely expected by market participants, the European Central Bank (ECB) left interest rates unchanged at 4 per cent —the first pause after 10 consecutive hikes. The ECB statement on its inflation target remained largely unchanged from September, noting that “interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal.” During the press conference on Thursday, ECB President Christine Lagarde stated that “having a discussion on rate cuts is totally, totally premature.” We think this hints at a central bank that is increasingly subscribing to the “higher for longer” narrative, but prudently maintaining its data dependency to determine how long rates will remain at this level. The bond market reaction was more notable following the press conference, as German 2-year Bunds rallied before settling around 3.06 per cent, while the euro against the U.S. dollar fell to an intraday low of 1.0525 from the prior day’s close of 1.0566.

"The risk of a recession in the eurozone has increased and growth risks remain tilted to the downside, in our view, with recent preliminary economic activity data as indicated by the October HCOB Eurozone Composite Purchasing Managers’ Index (released on Tuesday) pointing to economic stagnation. All measures across manufacturing, services, and the overall composite fell short of the expectations of economists polled by Bloomberg, and reached further into contractionary territory. Economic activity from services has been a bright spot for GDP since the start of this year, but the sector posted its worst reading in nearly four years."

Joost van Leenders, senior investment strategist at Van Lanschot Kempen
"In her press conference Lagarde noted the slowdown in money and credit growth and the weak latest ECB Bank Lending Survey. This survey showed that banks have continued to tighten lending standards in the third quarter (albeit at a slightly slower pace than in the second) and that credit demand has stayed weak. Higher bond yields mean that monetary transmission is transmitted more strongly to the economy. The ECB has noticed that the economy is weakening and that the weakness in the industrial sector has broadened to services.  And Lagarde also said that not all tightening measures from the ECB have been transmitted to the economy yet. There is more to come. The ECB has also seen signs that the labour market is weakening, although wage pressures are still (too) strong. So, no more rate hikes by the ECB. With the economy slowing under the weight of tighter monetary policy and inflation falling, the main question is, regarding the current policy rate level, how long sufficiently long is. Markets expect the first cut not before the summer of next year. Lagarde stressed that rate cuts were not discussed in the ECB policy meeting. But with a high risk of a recession in the eurozone, we see a possibility of earlier cuts than markets currently expect."