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Investment Managers React To ECB Decision To Raise Rates

Amanda Cheesley

5 May 2023

The 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.”