David Zane, head of the European Investment Department at Guaranteed Interest Rate by Franklin Templeton Investment House argues that the European Central Bank (ECB) will become more hawkish than capital market expectations and starting next July will start raising interest rates.
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The ECB held its meeting in June last week, and although it did not raise interest rates this time, it signaled that interest rate hikes would begin in July, 0.25%. At its June 9 meeting, the bank announced that its asset purchase plan (APP) would end at the end of the month. In addition, the ECB announced and further increases will come in September onwards.
“For now, the interest rate on deposits is 0.5%, but will not remain so for long. This is much more hawkish than I think the market expected that the ECB does see a rising risk of inflation – and is willing to act,” notes Zan.
While the central bank forecasts annual inflation of 6.8% in 2022, its inflation forecast for 2024 stands at only 2.1%, so it appears to have retreated close to its 2% target range.
According to Zane, this means that interest rates will continue to rise in the eurozone, but the question is how much. The ECB also lowered its growth forecast for 2022 and 2023, mainly due to the ongoing war in Ukraine.
“From the investors’ point of view, I think it’s really going to focus them on widening the spreads and dispersing in government bonds. No plan has been announced related to buying peripheral government bonds like Italy, Greece, etc., which some market guards expected. “The performance of these regional bonds has been low, and this low performance is expected to continue in the coming months,” he notes.
Bottom line, the ECB has decided to jump on the bandwagon and will begin – as central banks around the world have begun to do – to raise interest rates on the continent, which is expected to affect the bond market, where interest rates are also expected to start rising.
The ECB therefore made the decision not to raise interest rates last Thursday, the day before the release of US inflation data, which indicated an annual increase of 8.6%, above expectations of 8.3% and a 41-year high.
In its statement, ECB President Christine Lagard pledged to stop buying bonds as early as next month. His focus more on inflation.
Many estimate that after the publication of inflation, the central bank will raise interest rates by 0.5% not only in the next two meetings, but also in their third meeting.
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