Strategy
Investment Managers React To ECB Decision To Raise Rates
After the European Central Bank increased interest rates again this week, investment managers assess the macro economic impact as well as implications for asset allocation.
The European Central Bank raised interest rates again by 25 basis points to 3.25 per cent on Thursday, in a bid to curb inflation, and indicated that more tightening will come.
“We are not pausing – that is very clear. We know that we have more ground to cover,” ECB president Christine Lagarde said at a media briefing. It was the 7th consecutive rate hike, although it is the smallest rise so far.
Here are some reactions from investment managers to the move and what it means for asset allocation.
Hussain Mehdi, macro & investment strategist at HSBC
Asset Management:
“The downshift to a 0.25 per cent hike at this meeting makes
sense. Not only is core inflation stabilising, albeit at high
levels, but a dramatic tightening of financial conditions and
money growth points to a significant economic slowdown later this
year. Nevertheless, the ECB is concerned about the pass-through
from headline inflation into wage growth. Unlike the Fed, which
is now likely to pause, further ECB hikes over the summer period
are possible. Recent signs of softening activity, such as the
weak Q1 GDP print, imply the risk of overtightening and a
potential policy error.
“Overall, downside macro risks amid optimistic market pricing
means we continue to advocate a defensive asset allocation, which
includes an underweight view on European equities. Our macro view
is consistent with a preference for short-duration fixed income
assets, especially US Treasuries.”
Ed Hutchings, head of rates at Aviva
Investors:
“The ECB once again delivered a further hike to interest rates,
and it is abundantly clear that core inflationary pressures
remain too strong and a concern for the Governing Council. They
will continue to take whatever action is needed to achieve its
mandate and follow a data dependant approach, which right now
means that more hikes will be coming. The announcement that it
will end its winding down of the Asset Purchase Program in July
was a little earlier than some expected, and this could well see
European government bond yields rise further from here,
particularly so in more peripheral geographies such as Italy and
Greece where the most amount of extended support has been seen in
the past.”
Daniele Antonucci, chief economist & macro strategist,
Quintet Private Bank (parent of Brown Shipley):
“We’re not surprised that the European Central Bank slowed the
pace of rate hikes to a quarter of a percentage point. In part,
this move is no different from what the US Federal Reserve did.
But this is also partly related to the fact that central banks
have significantly raised borrowing costs over the past twelve
months to curb inflation.
“Our view is that the latest Federal Reserve hike will likely be
its last of the year and the final in its tightening cycle, with
the Bank of England also hiking once or maybe twice more before
pausing for the rest of the year. The European Central Bank may
raise for a little longer but should also bring its tightening
cycle to an end. Rising interest rates have triggered bouts of
financial instability and US banking-sector stresses. While
eurozone banks have so far been less impacted, credit conditions
are tightening at a fast pace across the region, causing loan
demand to slow. While credit tightening may imply less rate hikes
than previously envisages, our view for developed market central
banks to refrain from cutting interest rates this year contrasts
with markets expecting the Fed to lower rates the second half of
this year.
“Rather, we think the first cuts from all these central banks are
more likely at the start of 2024. With the ongoing slowdown in
growth, inflation easing and interest rates at their peak, we
maintain our overweight position in high-quality government and
corporate bonds. However, there are risks to our outlook as
central banks retain a data-dependent approach. The balance of
risks to the interest rate trajectory remains tilted to the
upside, especially if price pressures were to persist.”
Sandra Holdsworth, head of rates at Aegon Asset
Management:
“The ECB hiked interest rates again today but this time it was by
only 0.25 per cent a smaller increment than in recent meetings.
They continue to signal that rates are likely to rise further and
were at pains to point out that it is too early to suggest that
they are near a ‘pause’.
“Rates have now been increased by 375 bp since summer 2022 and Madame Lagarde admitted that higher interest rates were beginning to take effect on the economy.The ECB also made changes to the pace of decrease of the size of their balance sheet via changes to their reinvestment policy applied to some of the bonds that are held. The balance sheet is expected to contract by around €25 billion ($27.5 billion) per month on average which remains a much lower pace than that at the US Federal Reserve where the balance sheet is reducing by $95 billion per month.”