Thursday’s 50 basis point rate hike by the European Central Bank came as no surprise. The ECB’s deposit rate now stands at 2.5 percent. The ECB reiterated that it intends to deliver a similar rate hike at its next meeting in March.
The ECB’s hike came one day after a 25 point increase announced by the Federal Reserve, and coincided with a 50 point raise by the Bank of England.
Below a selection of commentaries from economists, fixed income analysts and other ECB watchers following Thursday’s decision.
Amundi expects deposit rate to peak at 3.5%
Amundi, Europe’s biggest asset manager, expects the ECB’s deposit rate will peak at 3.5 percent, higher than the market’s expectation of 3.25 percent. “An important takeaway from the February meeting was that the ECB no longer sees upside risks in its inflation forecast,” it said in a note to investors. “How long governments continue to extend fiscal support to the economy and the rebound in the Chinese economy will be key drivers of price pressures.”
Amundi remains upbeat about credit investments. “The ECB triggered a strong rally in bond markets with BTPs outperforming Bunds. The scale of the gains seems a little extreme to us. Credit is a good place to be,” it said, referring to strength in Italian government bonds, known as BTPs.
Schroders wonders about further hikes
Asset manager Schroders asks how much room there is for the ECB and other central banks to further increase rates. Economist George Brown noted that while the Fed has flagged adding another 50 basis points for the coming months it believes that we have seen the last Fed rate hike for the time being.
“Evidently, the Fed’s judgement that further tightening is appropriate presents clear risks to our view that rates have now peaked,” Brown said in a note to investors. Schroders cited three reasons for the peak: a softer economy, a turning labour market, and “convincingly moderated” inflation. “There were dovish undertones to (Powell’s) press conference, including an acknowledgement that a ‘disinflationary process’ was underway,” Brown said.
Addressing the ECB, Schroders’ Azad Zangana, senior European economist and strategist, noted that although ECB president Lagarde that there was no commitment made from March onwards, “our expectation, along with that in the market, is that interest rates would be kept on hold from that point on.”
MFS sees ECB as ‘dovish’
Annalisa Piazza, fixed income analyst at asset manager MFS noted that the ECB is widely committed to keep rates in restrictive territory to reach the inflation target in the medium term.
“The overall communication by the ECB remains relatively hawkish as the policy stance remains restrictive. That said, the market seems to interpret the lack of commitment beyond the March meeting and the now ‘balanced’ risks for growth and inflation as dovish signals and yields are falling sharply across all the main EGBs curves.”
Looking at the press conference, MFS noticed a few changes in Lagarde’s comments in comparison to the December meeting, especially on inflation. . “Risks are now more balanced and we would expect the March projections to show a substantial downward revision,” Piazza said, adding that she sees a terminal rate for the ECB deposits at 3.25 percent by mid-2023.
RBC BlueBay: Central bankers left looking irrelevant
Commenting on Europe, Mark Dowding, Bluebay CIO at RBC BlueBay Asset Management, said the ECB is playing catch-up with the Fed. “Many commentators now projecting the Eurozone to outgrow the US in 2023 at a time when inflation remains more elevated. It is understandable that Lagarde can remain hawkish for the time being. With respect to euro fixed income, we also look for yields to rise and think that supply is going to be a prevalent source of pressure on bonds in 2023.”
Dowding said central banks have become very wary of sending dovish signals on monetary policy, no matter how much the market will want to push for them. “Paradoxically we might observe that the stronger the economy and markets at the start of the year, then the weaker the outlook for both will be later in 2023. Conversely, if things looked materially weaker now, then this could be more of a harbinger of a stronger second half of the year.”