Investment Managers React To ECB Rate Hike

Amanda Cheesley Deputy Editor London 20 March 2023


As the banking sector reels from the collapse of Silicon Valley Bank, last week the European Central Bank raised interest rates, in what some see as a surprising move.

The European Central Bank raised interest rates last week across the eurozone by 0.5 percentage points, pushing the main rate up to 3.5 per cent, despite the market turmoil following developments at Silicon Valley Bank.

Defending the move, the ECB said that inflation is likely to remain high for too long, forcing it to continue with its rate increases, planned at the meeting in February. However, financial markets had been expecting a U-turn, in view of market turmoil. 

Christine Lagarde, president of the ECB, said in a statement: “We don’t see a trade off between price stability and financial stability and handle them separately. We are not waning on our commitment to fight inflation and we are determined to return inflation back to 2 per cent target in the medium term.”

The ECB’s move came after the Swiss Central Bank provided a SFr50 billion ($54 billion) loan facility for Credit Suisse.  

Here are some reactions from investment managers to the rate hike. 

BRI Wealth Management
Tom Hopkins, portfolio manager at BRI Wealth Management, said: “The European Central Bank has stuck to its plans and raised interest rates by 50 bps on Thursday, further pushing borrowing costs to the highest level since late 2008, to help temper the region’s stubbornly high inflation.” 

“Some may find this increase surprising given investors fears over the strength of the banking system. The failure of Silicon Valley Bank last week has permeated fear across global financials over the last few days resulting in some very heavy sell offs in European financials. The news this morning [Thursday 16 March] that Credit Suisse has secured a loan from the Swiss central banks has brought a small relief rally to markets today however we think it’s too early to tell as to whether the Silicon Valley Bank demise was just a one-off event. All eyes now will turn to the Fed’s rate decision next week,” he continued.
Franklin Templeton
David Zahn, head of European fixed income, Franklin Templeton, said: “The European Central Bank has hiked interest rates by 50 bps today in line with its forward guidance to combat inflation. The ECB’s objective is to target inflation and therefore, given its new inflation forecasts of 2.1 per cent and GDP growth of 1.6 per cent in 2025, we would anticipate further rate hikes in the coming months despite the current market volatility.”
“We are currently underweight interest rate risk in European accounts. However, we will look to build that back towards neutral over the coming quarters as we believe the ECB will over tighten interest rates given the inflation target as the current volatility hits the European economy. The bond market volatility is likely to continue through the remainder of the year as markets determine when the end of interest rate hikes will occur and the economic outlook going forward,” he continued.

Quintet Private Bank
Daniele Antonucci, chief economist & macro strategist, Quintet Private Bank (parent of Brown Shipley), said: “As widely signalled, the European Central Bank delivered on expectations and raised the key policy rate by 50 basis points. Given financial instability risks, there’s growing uncertainty on future ECB actions beyond this pre-signalled rate hike.”

“Our base case, currently, is that instability doesn’t derail the rate path too much. This means that because core inflation hasn’t even peaked, extra rate rises will follow. The magnitude of these possible rate increases, however, remains to be seen and, we suspect, the central bank may struggle to deliver in a scenario of high market volatility,” he continued.

“The Fed is unlikely to raise rates by 50 bps in March. Rather, 25 bps is more likely, in our view, and it may not even hike at all. There’s significant uncertainty beyond the March meeting also in this case – the Fed could pause for longer, just like the Bank of England. Macro data are likely to take a backseat until the financial sector settles down, including inflation data,” he said.

Principal Asset Management   
Seema Shah, global chief strategist at Principal Asset Management, said: “The 50b ps increase implies that, for the ECB at least, inflation concerns are still greater than financial stability concerns. Should investors be reassured by that? Or should they be worried that the ECB perhaps has some tunnel vision? Reassurances that the ECB toolkit is fully equipped to provide liquidity support will need to be sufficiently credible and convincing, otherwise the central bank will be facing hard questions about its actions."

“Clearly the ECB is stuck between a rock and a hard place and whatever its decision today [Thursday 16 March], it would have been met with some criticism. Finding a way to effectively separate price stability risks and financial stability risks is no small feat, yet it is absolutely necessary in an environment of elevated inflation and banking crisis concerns,” Shah added.

Algebris Investments  
Gabriele Foà, co-portfolio manager at Algebris Investments said: “The ECB hiked the deposit rate by 50 basis points to 3 per cent, in line with expectations. However, the statement sounds more dovish than expected. The central bank is not committing to more hikes, and now favours a meeting-by-meeting approach in light of recent volatility. Moreover, the ECB added a sentence on the soundness of the European banking sector, stressing the robust liquidity support in place at the ECB should stress emerge in the financial system."

“New inflation projections appear more hawkish, with 2024’s forecast revised up 60 basis points to 2.9 per cent and remaining above the 2 per cent target in 2025. Overall, the ECB is giving a message of pragmatism. The policy priority remains the inflation fight, but this can shift quickly if financial stability concerns emerge. Overall, we think rates should gradually move higher from current levels, as we expect the situation in the banking sector to remain contained. However, a pragmatic ECB stance should support risk as much as possible in the current volatile environment via a strengthening of the perceived central bank ‘put’,” she continued.

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