Strategy
ECB Increases Rates To Record High – Reactions
After the European Central Bank raised interest rates to a record high on Thursday, investment managers discuss the impact and the possibility of potential further hikes.
The European Central Bank increased interest rates for the 10th consecutive time on Thursday to an all-time high of 4 per cent, to combat inflation, but signalled that it would likely be the final hike.
Headline consumer price inflation stood at 5.3 per cent in August, unchanged from the annual rate of inflation in July, and the same level as core inflation, which strips out food and energy prices. “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” the ECB said in a statement. The target level is 2 per cent.
However, ECB president Christine Lagarde did not completely rule out a further hike if needed and said interest rates would have to remain at restrictive levels for some time.
Here are some reactions from investment managers to the hike.
Hussain Mehdi, macro and investment strategist, HSBC
Asset Management
“This was a knife-edge decision. Ultimately, however,
lingering inflation and a robust labour market trumped
considerations of a clearly stalling economy. We believe there is
a very good chance this is the last rate hike for the ECB. Policy
is now at highly restrictive levels and leading indicators remain
consistent with the bloc entering recession. Core inflation
pressures are moderating on a sequential basis. International
factors such as the Fed being in pause mode and China’s macro
challenges may also influence the ECB’s stance at upcoming
meetings. Elevated recession risk and restrictive policy in
the context of market pricing, which embeds a ‘soft landing’
outcome, makes us cautious on developed market risk assets,
including European equities. At this point in the economic cycle,
we prefer exposure to high-quality fixed income.”
Robert Schramm-Fuchs, portfolio manager on the European
Equities team, Janus Henderson Investors
“It was probably a close decision, but we did get that one final
interest rate hike from the ECB that the stock market was mostly
expecting. Judging from the language of the statement and
downgraded mid-term inflation estimates, it sounds like the ECB
is done now with the hiking cycle, and we should expect a long
plateau. Historically, it seems equity markets have tended to
like the last rate hike in a cycle whether a recession followed
or not. Europe’s largest economy Germany certainly has been on
the brink of a technical recession throughout this year, and the
eurozone overall not so far removed from it. Insofar, this should
no longer surprise negatively. Many cyclical European stocks are
already priced for recession. Consequently, we now see improved
risk-reward and a fertile hunting ground for European stock
pickers.”
Chris Beauchamp, chief market analyst, IG Group, the
trading platform
“A reluctant hike from the ECB comes with a clear message of
‘that’s all folks’, at least for now. It seems that the ECB will
now hold policy steady unless and until inflation surges again.
This has dealt a major blow to the euro, but offers a crumb of
comfort to eurozone equities.”
Seema Shah, chief global strategist, Principal Asset
Management
“The ECB’s 25 basis points hike is an uncomfortable
acknowledgement of the sticky inflation situation the euro area
continues to face, even as the economy slows, and is a hark back
to the old days when the ECB was considered the most hawkish of
central banks. The revised forecasts lay bare the tough dilemma
facing the central bank: downwards revisions to growth, but
upwards revisions to inflation. Yet, while this confusing picture
set the backdrop for what was probably a heated debate within the
Governing Council, future decisions will likely be more clear
cut. Indeed, although the ECB has left the door slightly ajar for
further tightening, the fact that recession risks are rising once
again likely means that this is the final hike.”
Charles Hepworth, investment director, GAM
Investments
“The ECB now sees inflation this year moving a tad higher to 5.6
per cent, whilst next year is raised 20 bps to 3.2 per
cent. It is only in 2025 the ECB expects inflation to
moderate to its 2 per cent target (although it still will be just
slightly above that at 2.1 per cent). Forecasts for growth
in the region however, go the opposite way to inflation, with
this year downgraded to a relatively stagnant 0.7 per cent (from
0.9 per cent at their last forecast). Next year sees a 50
bps downgrade to growth, now forecast to come in at 1 per
cent. This tepid growth, with persistent higher than target,
fits the classic definition of stagflation. What the ECB
will hope for is that it is done with this hiking cycle amid the
cooling growth. But that all depends on inflation and, even
if markets are currently optimistically pricing in cuts within a
year, inflation needs to fall aggressively and/or growth
falls further – neither of which the ECB sees happening anytime
soon.”
Daniele Antonucci, chief investment officer, Quintet
Private Bank (parent of Brown Shipley)
“That the European Central Bank raised rates today was expected
in the marketplace. Even though investors initially thought the
central bank was likely to stay on hold, a leaked story on upward
revisions to the inflation projections led to a higher
probability of a rate hike. The important thing, though, is that
the upward revisions to the inflation path for 2023 and 2024 are
mostly due to higher oil prices.
“We expect global economic growth to slow over the coming months, due to tighter monetary conditions in major economies and weakening growth prospects in China. The rate increase to a record high, though, appears to be the last one in this cycle, unless energy prices were to surge. Central banks will likely maintain interest rates elevated for the time being. After all, inflation, despite slowing, remains above target. This means we are at the peak in interest rates, but rate cuts seem unlikely in the near term.”
Clémence Dachicourt, senior portfolio manager,
Morningstar Investment Consulting France
“Opinions across the ECB Governing Council members were divided,
yet today’s decision to raise interest rates by 0.25 per cent is
aligned with the European Central Bank’s price stability mandate.
The ECB is walking on a very treacherous path right now: economic
growth in the eurozone has come to a halt, expectations for
future growth prospects are bleak, yet core inflation remains
stubbornly high and way significantly above the central bank’s 2
per cent target. While this draws the effectiveness of the ECB’s
rate hikes into question, the central bank will certainly want to
avoid errors of the past when it decided to raise interest rates
in July 2008, at the same time as the global economy was heading
into one of the biggest financial crises, or again in 2011 just
before the eurozone crisis. Going forward, the European Central
Bank may decide to be more considerate about underlying economic
growth and pause interest rate hikes to avoid precipitating the
zone into a deep recession.”
Jill Hirzel, senior investment specialist, Insight
Investment
“The ECB raised rates by 25 basis points, and gave their clearest
forward guidance yet that a material change in data would be
needed to justify further hikes. Although the peak in rates may
now be in, we expect policy to remain restrictive for an extended
period to bring inflation back to target absent [of] a negative
growth shock. Data releases in the months ahead will give a
better idea of the lagged impact of previous hikes on the
underlying economy.”
Patrice Gautry, UBP
"The ECB has not surprised the markets by hiking interest rates
but more with some dovish comments about the forward guidance on
rates. While upside risks remain on inflation under the
current situation, key rates have reached a restrictive
level. The ECB has implicitly said that rates are now at a
peak or very close to it. The option to do another hike depends
on future core inflation, which is the main ECB concern.
Nevertheless, Ms Lagarde mentioned inflation should
significantly reduce further next month due to very positive
effects from energy prices. This statement of "sufficiently
restrictive" rates for a "sufficiently long period" sounds more
dovish for markets than in previous ECB communications. The
probability of having another rate hike should come lower and
lower, given the expected scenario on growth and inflation."