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The ECB Maintains Interest Rates: Asset Managers’ Reactions
Macro

The ECB Maintains Interest Rates: Asset Managers’ Reactions

In its meeting yesterday, the Governing Council (GC) of the ECB left its official interest rates unchanged, in line with expectations.
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15 DEC, 2023

By Johanna Zidani from RankiaPro Europe

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The last ECB meeting of this year concluded much like the recent FED meeting just 24 hours prior: without surprises. The institution presided over by Christine Lagarde has decided to maintain interest rates at 4.5% for the second consecutive month, even though the president emphasized in her speech that it is not yet time to 'let down our guard.' How do asset management companies interpret this move? Discover it in this post:

Azad Zangana, Senior Strategist and Economist for Europe at Schroders

Eurozone inflation is already on track to return to the European Central Bank's 2% target in the first half of 2024. Weakness in growth should alleviate any persistent pressure on underlying prices, likely ensuring that the ECB becomes the first central bank among major developed markets to begin cutting interest rates.

In fact, economic activity has deteriorated rapidly, indicating that the economy was already flirting with recession in the second half of 2023. Therefore, the disappearance of demand pressures, coupled with the resolution of the past energy price crisis, is likely to ensure that overall inflation returns to the ECB's 2% target in the first half of 2024, clearing the way for interest rate cuts.

We expect the ECB to implement a cut of 150 basis points from the first quarter of 2024, bringing the main refinancing and deposit rates to 3% and 2.5%, respectively, by 2025. This should support a modest recovery in GDP growth to 1.7% in 2025 from 0.7% in 2024.

Martin Wolburg, Senior Economist at Generali Investments

In its meeting yesterday, the Governing Council (GC) of the ECB left its official interest rates unchanged, in line with expectations. However, it decided to gradually phase out total reinvestments under the PEPP in the second half of 2024, adopting a less aggressive stance.


Updated forecasts from the Commission's services lowered short-term growth and inflation outlooks. General inflation is expected to return to the target in 2025 and decline to 1.9% in 2026, while core inflation is considered more persistent, averaging 2.1% in 2026. Economic growth is expected to regain momentum in 2024.


The GC adopted a more balanced tone and no longer considers inflation to be "too high for too long" but rather expects pressure on internal prices to "remain elevated." In the Q&A session, President Lagarde made it clear that wage data released between January 1 and February 24 will be of great importance.
The GC decided to expedite the end of total reinvestments under the PEPP, as it "intends to reduce the PEPP portfolio by an average of 7.5 billion euros per month" in the second half of 2024 and to completely cease these reinvestments by the end of 2024. The main reason cited was the normalization of balances, but we also perceive confidence that PEPP reinvestments, as the first line of defense against financial fragmentation, will not be necessary.


Overall, we receive clear signals that the ECB is poised to pivot in 2024, but Lagarde tried to temper speculation about rapid interest rate cuts. We continue to consider a first rate cut in June 2024 as more probable. There are no changes in interest rates, but PEPP QT will begin in mid-2024: In its meeting yesterday, the Governing Council decided, as expected, to keep official interest rates unchanged: the deposit rate at 4.00% and the repo rate at 4.50%. It continues with non-reinvestments under the APP but announced that it "intends to reduce the APP portfolio by an average of 7.5 billion euros per month" during the second half of 2024 and to completely stop reinvestments by the end of 2024.

Konstantin Veit, Portfolio Manager at Pimco

The ECB continues to be fully dependent on data, meeting by meeting. Key data points include unit labor costs and corporate profit margins. With interest rates presumably at peak levels, market attention has shifted firmly toward the next cycle of rate cuts. We believe that risks are still biased towards later rate cuts compared to current market expectations. To achieve full normalization of inflation to the 2% target, we believe that further cooling of the economy and the labor market may be necessary. The recent reduction in reinvestments from the Pandemic Emergency Purchase Program (PEPP) weakens the technical outlook for government bonds and suggests that investors are demanding relatively higher compensation for holding longer-term bonds.

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