Investment managers react to the latest interest rate hike by the European Central Bank.

The European Central Bank raised interest rates by 75 basis points this week to curb rising inflation.

The move follows an increase from -0.5 per cent to zero in July.

“This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2 per cent medium target,” the ECB said in a statement.

The central bank expects to increase rates further, saying that inflation remains far too high and is likely to stay about target for an extended period.

The ECB also adjusted its inflation expectations, forecasting an average of 8.1 per cent in 2022, 5.5 per cent in 2023 and 2.3 per cent in 2024.

Here are some reactions from investment managers to the hike.

Hinesh Patel, portfolio manager, Quilter Investors
“Having at long last joined the rate hike club in July with the first ECB interest rate rise for 11 years, it comes as little surprise that a further increase has been introduced today. A larger rate rise had already been penned in for September and, with the eurozone’s headline annual inflation rate rising to 9.1 per cent last month, this was confirmed in the form of a 75 basis point hike with the promise of more to come.

“However, the ECB governing council’s decision to further increase rates is a sideshow to the increasing risks of sovereign debt sustainability. More important is the disappointing lack of news on measures to be deployed to reduce the risk of another sovereign debt crisis.

“At the margin, increasing policy rates will be a welcome boost for banks and savers who have been financially repressed, yet this cannot solve the energy crisis exacerbated by Russia’s ongoing aggression on Ukraine.

“Ultimately, Lagarde’s council may be repeating the same mistake as Trichet’s in 2011 by hiking in to rising commodity prices that are outside of monetary policy control.”

Gurpreet Gill, macro strategist, Global Fixed Income, Goldman Sachs Asset Management
“Not too long ago, a 0.75 per cent increase in the policy rate would have been considered a complete hiking cycle in the euro area. Today’s further outsized rate increase is in response to an upside surprise in recent inflation data and a more hawkish inflation outlook ahead.

“We agree with the ECB’s view that some of the factors driving inflation – deglobalisation, rising physical climate risks and energy supply challenges – imply higher and more persistent inflation relative to the last cycle.

“The central bank appears to believe a deceleration in growth – which is projected to drop to below 1 per cent in 2023 – will be insufficient to alleviate inflation and that it is prudent to tighten policy forcefully to prevent inflation becoming more entrenched.

“Although it said it expects to raise interest rates further, given high uncertainty, particularly in relation to energy prices, the ECB continues to refrain from explicit forward guidance on the future hiking pace and instead maintains a data-dependent, meeting-by-meeting approach.”

Seema Shah, chief global strategist, Principal Global Investors  
“The ECB has joined the 75 bps club. Today’s policy rate increase, the largest in the single currency area’s history, comes despite the oncoming recession and is testament to the enormity of the inflation challenge facing the central bank. With inflation at a record high and almost five times greater than the ECB’s 2 per cent target, and inflation expectations unbearably elevated, the ECB’s hand has been forced.

“There may be some slight reprieve for the euro today. Yet this will likely be short lived. While the ECB has downgraded their economic forecasts to show stagnation later this year, even this is over-optimistic. Unlike the Fed, where the recession is still a couple of quarters away, the energy crisis means that a euro area recession is already brushing up against the ECB, likely limiting how high ECB rates can realistically rise – irrespective of the very pressing inflation problem.”

Willem Sels, global chief investment officer, Global Private Banking and Wealth, HSBC 
“The ECB and other central banks have been torn between the need to crush inflation and their realisation that recession risks continue to increase. So markets were unsure whether the ECB would be raised by 0.5 per cent or by 0.75 per cent. By opting for 0.75 per cent, the ECB took the more hawkish option, in line with the more hawkish tone central banks have been sending since the Jackson Hole meeting of central bankers in late August. Gas prices have been rising sharply, and we know that the ECB is concerned that rising inflation leads to higher wage demands, which could make inflation pressures more sticky. Monetary policy acts with a lag, and ECB governors may have judged that it is better to front-load rate hikes and to finish hiking by the end of the year.

“It is no surprise that the euro rose a bit on the announcement. But we think that the upside is not sustainable, given that the euro remains a low yielding currency compared to others, as the market also prices in a more than 50/50 chance that the Fed and the Bank of England will hike rates by 0.75 per cent. 

“In addition, the rising cost of debt, the recession, the Italian election and geopolitical risks are headwinds for the euro.

“Bond markets and equity markets have reacted with some concern: the rate hikes will further raise borrowing costs of peripheral countries and tighten financial conditions, which may deepen the recession. The ECB must have judged that this is the price to pay for crushing the inflation dragon. Because of the cyclical concerns, sticky inflation and tightening policy, we maintain our underweight on Eurozone stocks.”

Rupert Thompson, investment strategist, Kingswood
“The ECB has raised rates by an unprecedented 0.75 per cent in response to the recent surge in inflation, ratcheting up the pace of policy tightening as both the Fed and BOE have done in recent months. It is very much prioritising getting inflation back under control even as the economy looks headed into recession later this year. This move can only add to the pressure on the Bank of England to follow suit with a 0.75 per cent rise next week, particularly with the news today of the government’s large-scale intervention to cap household and business energy bills.” 

Gabriele Foà, co-portfolio manager, Algebris Investments
“The ECB hiked the deposit rate by 75 bps to 0.75 per cent and delivered a hawkish message.

“Inflation projections were revised substantially to the upside, to 8.1 per cent in 2022 and 5.5 per cent in 2023. Recent increases in gas prices imply a higher level and later peak for European inflation.

“The ECB is worried about the potential impact of higher headline on inflation expectations – hence core inflation – and the euro. As such, the message remains focused on inflation despite a weaker growth outlook.

“The market is now pricing the terminal rate close to 2.25 per cent, but the ECB may decide to turn more hawkish in subsequent meetings and keep the pace of hikes elevated. As such, we expect further upside to the number of hikes currently being priced by markets.”

Candice Bangsund, vice president and portfolio manager, Global Asset Allocation, Fiera Capital
"A stagnating growth outlook did not deter the European Central Bank from pushing through another outsized rate hike at the September gathering, with the central bank raising its main refinancing rate by 0.75 per cent to 1.25 per cent and reinforcing the need to raise interest rates further in order to combat record-high inflation and anchor inflation expectations.

"Policymakers have clearly prioritised tackling persistently elevated inflation, regardless of the economic fallout. The European Central Bank is in a precarious position as policymakers attempt to rein in record-high inflation even in the wake of a deteriorating economy and as recession risks loom large. Indeed, the new forecasts revealed that both the growth and inflation outlooks have worsened, with the 2023 growth forecast slashed to 0.9 per cent from 2.1 per cent in the prior forecast, while inflation forecasts were revised broadly higher through 2024.”