This afternoon’s announcement that the European Central Bank (ECB) has raised interest rates by 0.75% in its continuing attempt to fight off the surge in inflation. The move was largely anticipated by the markets but further rises in subsequent months are likely as the ECB attempts to return inflation to its 2% medium term target.
But what does today’s news mean for the investment markets? Experts have been sharing their views with us as follows:
Jeremy Batstone Carr, European Strategist, Raymond James: “The European Central Bank (ECB) is between a rock and a hard place as it looks to control inflation without tanking the economy and has decided that potentially tipping the region into a recession is a necessary evil in order to control spiralling inflation.
“The Eurozone is facing challenges that will be familiar to much of the rest of the world, with headline regional inflation running at a year-on-year rate of 10%, five times the target level. In response the ECB has raised its base interest rate by a further 0.75 points as it prioritises its core mandate of ensuring price stability. However, the attempt to cushion the blow to households and businesses from rising costs is likely to create issues elsewhere by imparting a marked downward pressure on economic activity by dramatically increasing the cost of borrowing.
“While its US and UK counterparts are acting to reduce of the size of the balance sheet, the ECB is taking a different route and shunning the quantitative tightening path. A bigger priority for the ECB will be the trend in bond yield spreads between the peripheral and core member states. The Bank unveiled its new Transmission Protection Instrument this summer, and even though it has had no cause to use the facility thus far, its mere presence ensures that spreads remain within the boundaries of acceptability. But, as markets face ongoing pressures, the ECB may intervene using this tool to control disorderly dynamics.”
Dan Boardman-Weston, CEO and Chief Investment Officer at BRI Wealth Management, said: “The European Central Bank has increased interest rates by 0.75% to 2.0%, largely expected by markets. Inflation continues to hit at multi-decade highs, 9.9% in September, and is putting pressure on the ECB to try and counteract it. Rates are likely to continue going up until there is clarity that inflation is falling and the ECB may come under pressure to be more aggressive with rate hikes, depending on what course other central banks take going forward.
“The ECB has a difficult balancing act though as inflation continues to darken the economic outlook, meaning they are raising rates at a time when the economy could do with a more dovish stance. The growth outlook for Europe is gloomier than it has been since the dark days of Covid or the Eurozone crisis a decade ago, and we’re likely to see a material slowdown in economic activity through the rest of 2022. The inflation continues to be largely supply driven and interest rate increases are not going to assist with these contributory factors to inflation. 2022 will likely be a pivotal year for monetary policy and the risks of a policy misstep and a recession have increased during the year.”
Anna Stupnytska, Global Economist, Fidelity International, said: “At its October meeting, the ECB hiked all three policy rates by 75bp, in line with expectations. The main change in the statement was the dropping of the reference to rate hikes happening over the ‘next several meetings’, and declaring that the governing council had made ‘substantial progress’ towards withdrawing policy accommodation. With today’s decision widely expected, the main focus now is on the rate trajectory and any QT decisions from here. The ECB continues facing a sharp trade-off between high inflation, which remains at all-time highs, and a rapidly deteriorating economic outlook, with a looming recession on the horizon.
“As the global energy crisis unfolds with Europe bearing the brunt, the ECB’s window of opportunity for aggressive frontloading of policy tightening is shrinking rapidly. Today’s move is likely to be the last ‘jumbo’ hike in this cycle, followed by smaller rate increases and an earlier pause, or indeed abandonment of tightening, relative to expectations. Given the multiple moving parts, uncertainty around the European macro outlook remains highly elevated and will crucially depend on the size and composition of fiscal responses, which, together with developments in the euro and peripheral spreads, will shape the ECB path from here.”
Marcus Brookes, chief investment officer at Quilter Investors: “We have now seen successive 75 basis point interest rate increases by ECB. Having been a rate hike laggard, the ECB is now taking strong action to halt soaring inflation. This latest hike follows a 75 basis point increase in September and 50 basis points increase in August, bringing the rate to its highest for more than a decade.
“It comes as little surprise as the eurozone looks to tackle bloating inflationary pressures, with its annual inflation rate rising to 9.9% last month. Like all central banks, the balancing act faced by the ECB continues to be a tricky one. The bloc is faced with inflationary shock that requires decisive action, yet Russia’s ongoing war in Ukraine continues to cast a shadow of uncertainty over Europe that could end with weak demand and recession.
“While the further increase will be another welcome boost for banks and savers, it will not solve pressures on households brought about by the energy crisis. Furthermore, as the ECB raises interest rates to fight rampant inflation, sovereign debt dynamics will continue to deteriorate, and we need more on measures to be deployed to reduce the risk of another sovereign debt crisis.“
