The ECB raised interest rates by a quarter point at its meeting on Thursday, taking them to 4.5%, their highest level since May 2001. The European Central Bank also raised the deposit facility to 4%. In doing so, Christine Lagarde raised interest rates for the tenth consecutive month, marking the longest streak of increases since the introduction of the euro.
With today’s decision, the ECB makes it clear that it is committed to fighting inflation but raises questions about whether it is going too far and repeating past mistakes. What do the experts think of the decision? We leave you with the first reactions from investment fund industry professionals.
Felix Feather, Economic Analyst, abrdn
In the end, the recent rebound in energy commodity prices was enough to tip the balance in favor of a tenth consecutive hike. The decision takes the deposit rate to its highest level in the history of the institution.
The decision comes despite very weak activity data in recent months. We believe that the ECB continues to raise rates in a recession that is probably already underway. The latest increase could aggravate the recession and slow the recovery. Despite losing out on the rate decision, it seems that the dovish members of the bank have been able to secure a dovish framework in which the hike has taken place. In fact, it looks like the bank is ending its hiking cycle (barring any major surprises).
We believe that this will be the last rate hike of this cycle. However, we expect cuts in 2024, when the effects of the next recession on the labor market and consumer prices will become apparent.
Eric Winograd, chief economist at AllianceBernstein
In the statement accompanying its interest rate decisions, the Governing Council notes that “On the basis of its current assessment, the Governing Council considers that the key ECB interest rates have reached levels which, sustained over a sufficiently long period, will contribute substantially to a timely return of inflation to target”. While this may not be an explicit promise of no further rate hikes, it is a very strong direction in that direction, a message reinforced by President Lagarde’s confirmation that today’s decision was not unanimous and that some members of the Governing Council preferred to pause.
It would take something drastic for them to resume rate hikes, and I don’t expect that to happen. The European economy slowed over the summer and forward-looking indicators suggest at best a moderate growth outlook. Germany, in particular, is struggling as global trade flows weaken and the Chinese economy struggles. With growth sluggish and slowing, I expect inflation to come down over time.
I do not expect the ECB decision to influence next week’s Fed decision, where I continue to expect no hike. I also doubt that the Fed will offer the same kind of explicit guidance that the ECB has offered today. That said, the Fed’s current dot plot reflects its expectation that there will be one additional rate hike this year; a change in that expectation would be a significant sign that the cycle is over, even if it is not as explicit as the language used by the ECB.
Anna Stupnytska, Global Macroeconomist at Fidelity International
The interest rate decision has been hard-fought and, in the end, the ECB’s inflation-fighting instincts won out over concerns about deteriorating growth. The still elevated momentum of core inflation, combined with rising oil prices – which pose upside risks to the overall trajectory – meant that the ECB could not afford to wait for the next meeting. With what will most likely be the last hike of this cycle out of the way, the ECB is now moving into wait-and-see mode, while preserving optionality.
From now on the markets’ attention will focus on how long rates will remain at these restrictive levels, which will of course depend on the trajectory of inflation and growth from now on. At the press conference, Christine Lagarde underlined the ECB’s determination to keep interest rates at “sufficiently restrictive levels for as long as necessary”. With the monetary policy transmission channel clearly working hard, a recession in the euro area is on the horizon. As a result, the ECB may have to make a quick course correction in 2024, but for the time being its guidance is likely to focus on the “higher for longer” scenario.
Jon Maier, Chief Investment Officer, Global X
Funding for banks has become pricier. As a result, average lending rates have been on an upward trajectory. There’s a noticeable weakening in credit dynamics, and even though loan growth is dwindling, it remains in positive territory. Loans to households have witnessed a downturn, marking the most significant drop since the introduction of the Euro. While inflation is receding, it’s predicted to remain elevated for an extended period.
Based on the current assessment, ECB President Lagarde indicated the prevailing interest rates are deemed adequate to steer inflation back to the desired target. Consequently, the intention is to maintain these elevated rates for as long as necessary to achieve this goal. But data dependency remains the rule.
Economic growth prospects tilt more towards potential deceleration, especially if the impact of monetary policy intensifies. Conversely, dispelling uncertainties and bolstering consumer spending could lead to heightened growth. It’s noteworthy that the primary inflation catalysts are energy and food costs.
The U.S. economy once again showcased its distinctive resilience. Retail sales surged significantly, though labor figures were somewhat softer than anticipated – a development some might interpret favorably. The Producer Price Index (PPI) reported figures higher than expectations moving the front of the treasury curve higher. Meanwhile, in Europe, the ECB decided to hike rates amid dimming growth prospects, leading to a robust U.S. dollar and a declining Euro.
Robert Scramm-Fuchs, portfolio manager in the European equity team at 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, as 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.
Samy Chaar, Chief Economist, Lombard Odier
The European Central Bank has announced a moderate hike rather than an aggressive pause. The impact of the interest rate hike has been somewhat offset by the hint that rates have peaked. The statement can best be described as a balancing act between overly strong inflation and weaker economic activity. A compromise was a rate hike of 25 basis points, being clearer on a pause, but retaining the option to hike further if necessary to avoid any declaration of victory on inflation. After this latest tap on the brakes, we feel increasingly confident that the ECB’s job is done, with the “peak and plateau” strategy being the appropriate risk management tool.
We should not exaggerate the importance of this hike; whether the ECB stops at 3.75% or 4.00% does not matter much in the wider context. From a tactical perspective, it was a case of “now or never” for ECB policymakers. Given the abundant evidence that monetary policy transmission is working – both inflation and growth momentum are fading – the case for tightening is likely to weaken in the coming months.
Experts revised growth forecasts significantly downwards. They also revised inflation figures modestly downwards, bringing inflation closer to the target in 2025, albeit to 3.2% in 2024, which strengthens the case for today’s decision. Although core HICP inflation remained well above target at 5.3% in August, underlying momentum has slowed in recent months, and the base effect will be very negative in September. Nominal wage growth and unit labor cost growth have started to slow.
Disinflation will now come from the services side, albeit more slowly than the trajectory already observed in goods prices. In the meantime, growth is likely to remain subdued, and almost in stagnation territory, as activity in the services sector normalizes. Demand for credit has already weakened substantially.
Tomasz Wieladek, economista jefe para Europa en T. Rowe Price
As highlighted by President Lagarde, the labor market remains resilient, but I believe that the labor market will turn quicker than expected. Unemployment rates in July already rose in Germany, Italy and France. The only reason that the overall unemployment rate remained at its record low in July was because Spanish unemployment is still falling. However, given that surveys imply that services are now beginning to contract in Spain, the Spanish unemployment outperformance is unlikely to last. Leading indicators suggest that the labor market will deteriorate further in the coming months.
In the past, the ECB had typically cut interest rates when the labor market started to deteriorate significantly. I believe that we will get to that stage within the next 6 months or so. This implies an earlier cut than currently priced by markets. I believe that once the labor market turns, the ECB will cut the depo rate significantly next year. Markets will still need to price more cuts into the curve over the next year based on the weakness of data in the coming months.
The Euro will now become data-dependent and will fall further. I believe that the data will remain weak or continue to deteriorate going forward. The Euro will likely fall to 1.05 against the Dollar by the end of the year, as more cuts are priced in.
