Client Affairs

Investment Managers React To ECB Rate Hike

Amanda Cheesley Deputy Editor 28 October 2022

After the European Central Bank raised interest rates again this week to fight soaring inflation, investment managers discuss the impact.

The ECB[/tag has increased its deposit rate by another 75 basis points to 1.5 per cent, reaching its highest level since 2009.

The Governing Council expects further hikes, to ensure the timely return of inflation to its 2 per cent medium-term inflation target, the ECB said in a statement.

The central bank also scaled back support for European banks. It changed the terms and conditions of its targeted long-term refinancing operations, which provide European banks with attractive borrowing conditions. As a result, the euro fell and European government bond slid, which was in keeping with market expectations.

Here are some reactions from investment managers to the news.

Neil Birrell, CIO and fund manager of Premier Miton Investors
The ECB increased rates to 1.5 per cent, exactly as expected, and has said they are going higher, which shouldn’t be a surprise given that inflation is almost 10 per cent. Central banks everywhere will be looking at the economic data and will make decisions accordingly. They won’t want to overdo it and damage their economies more than they have to. But, let’s be clear, inflation is the primary fear, not recession, and beating it is the most important battle to win. For now, it’s difficult to see what level the ECB will see peak rates reaching.

Gurpreet Gill, macro strategist of global fixed income at Goldman Sachs Asset Management
Investor focus will now turn to long-run inflation expectations in the ECB’s Survey of Professional Forecasters (SPF), expected on Friday, for evidence of second-round inflation effects. Recently, the survey has shown long-run inflation expectations at a record high of 2.2 per cent. Further strength in inflation or inflation expectations could prompt the ECB to maintain its aggressive approach at the next meeting in December with a further 0.75 per cent rate rise. Our current expectation is for a 0.5 per cent increase, in anticipation of further signs of a slowdown and given the ECB believes it has already ‘made substantial progress’ in withdrawing policy accommodation.

Hussain Mehdi, macro & investment strategist at HSBC Asset Management
With inflation still close to double digits and policy not yet restrictive, the ECB is clearly under pressure to deliver jumbo rate hikes even in a backdrop of contracting economic activity and a lurch into recession. With risks remaining elevated, near-term catalysts to unlock value in European equities remain unlikely, but with cooling inflation, lower gas prices, and easing of supply-chain bottlenecks, this opens up room for a policy pivot in early 2023 that could usher in a period of better market performance.

Charles Hepworth, Investment Director, GAM Investments
With Eurozone inflation last month hitting close to five times the ECB target, at 9.9 per cent, it was all but guaranteed that they would hike aggressively by 0.75 per cent today - doubling the Deposit Facility Rate to 1.5 per cent. In addition, the Governing Council’s accompanying statement committed to raising rates further at future meetings, given inflation remains far too high. Where the ECB terminal rate gets to, perhaps a year from now, is still dependent on underlying inflation. Markets, for their part at least, are pricing in an almost doubling in rates from here.

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