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ECB Increases Rates To Record High – Reactions

Amanda Cheesley

15 September 2023

The  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 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."