The ECB maintains interest rates at 4.5%. Initial reactions from fund managers

The first ECB meeting of the year has concluded just like the last one in 2023: without surprises. The institution chaired by Christine Lagarde has decided to keep interest rates at 4.5% for the third consecutive meeting. How do professionals in the sector interpret this decision? We show you below.

Ann-Katrin Petersen, Senior Investment Strategist from BlackRock Investment Institute

ECB says “You can't hurry rate cuts, you just have to wait”.

• The ECB will cut rates in 2024 but is in no hurry – it still considers its inflation fight unfinished. As expected, the central bank kept all policy rates on hold at today’s meeting. President Lagarde emphasized “data dependency” instead of “date dependency” – but did not push back strongly against market expectations of rate cuts starting in April.
• We expect headline inflation to fall to – or even temporarily undershoot – the ECB’s 2% inflation target in 2024 as the impact of the energy shock unwinds and ECB rate hikes bite. Most inflation measures have continued to ease and economic activity remains subdued.
• But this is still not a return to the world as we knew it, we think. With a tight labour market and subdued productivity, wage pressures could remain high, causing euro area inflation to rollercoaster back up againonce energy and goods prices have finished adjusting. It will likely take at least until the spring wage negotiations for the ECB to gain confidence that inflation is returning durably to 2%. That's why we think the ECB will not rush into cutting rates.
• We expect continued volatility in bond markets and stick to our tactically neutral stance on euro area government bonds. Market pricing for the size of rate cuts this year looks less ambitious than for the Fed – even though we think the ECB has hit the brakes more aggressively than the Fed. What would it take for the bond market rally to continue? Consistently weaker macroeconomic data, any unexpected further progress on the inflation front and even more euro area fiscal consolidation ahead than currently anticipated, leading to lower bond supply.

Robert Schramm-Fuchs, European equity fund manager at Janus Henderson Investors.

In our view, today’s ECB press conference is encouraging for equity markets. It seems the ECB President Mrs Lagarde left the door firmly open for an April start to the rate cut cycle as she highlighted the importance of the updated staff projections which will become available in March. The President spoke a lot about wage pressures today, but the reality is that six-month headline and core inflation in the Eurozone have fallen back into the low 2’s% annualised rate already now. Monetary lead indicators point to a further reduction which should hint at annual inflation rate returning to its 2% target during 2H24. Given the stagnant European economy close to the brink of recession over the past 18 months already – vs a seemingly perfect soft landing in the US – ECB rate cuts should stay firmly in the equity market’s sight. In our European Large Cap funds, we are positioned bullishly, and are favouring sectors that have historically outperformed in rate cut cycles, e.g. technology and in particular semiconductors, financial services and consumer discretionary.

Martin Wolburg, Senior Economist at Generali Investments

Following an overall favorable inflation data, markets have started speculating about ECB key rate cuts beginning in the second quarter. Recent comments from Governing Council members were more heterogenous and President Lagarde again emphasized the importance of this year’s collective wage agreements. Major latest agreements in France, Spain and the Netherlands were quite high and unlikely tamed concerns about medium term inflation. Therefore, at Thursday’s policy meeting we expect the ECB to adopt a wait-and-see stance emphasizing data-dependence once more. We continue to look for a first rate cut by June only and think that the narrative of the accompanying press conference will be consistent with this view.

Orla Garvey, Senior Portfolio Manager for Fixed Income at Federated Hermes

As expected the ECB remained on hold today, with Lagarde providing little in the way of guidance at the press conference. We expect that the ECB will become incrementally more dovish at the time of the March meeting, when the latest macroeconomic projections are released. The market is pricing roughly 180bps of cuts over the course of the next two years, with the bulk of that coming in the second half of 2024. We think, considering the progress made on inflation and weak growth outlook, this is entirely reasonable. Looking ahead, the key question now is does the cycle end with rates in neutral or stimulative territory? That will partly be informed by how long the ECB wait to begin.

Konstantin Veit, Portfolio Manager at PIMCO

• The ECB remains firmly on hold, and maintains its data-dependent, meeting-by-meeting approach.
• While interest rates have presumably peaked, the market is pricing an early and quick monetary policy reversal.
• We think the risk remains skewed to somewhat later and less aggressive easing than embedded in market expectations for this year.
• Key areas to watch will be financial conditions, the fiscal stance, profit margins and unit labour costs developments, with a particular focus on wage growth.