Persistent inflation to keep ECB on aggressive tightening path, BlueBay AM says
Summary
- Eurozone inflation hit a new record of 10.0% in September and is expected to rise further amid higher energy prices
The European Central Bank has limited room to abandon significant interest rate rises any time soon as inflation is likely yet to peak in the eurozone, Mark Dowding, chief investment officer at BlueBay Asset Management told Dow Jones Newswires in an interview.
“I don’t really get much of a sense that there is a lot the ECB can do to move away from a relatively aggressive stance when signaling further rate hikes to come," he said.
This backdrop leaves the outlook for a 75 basis point interest rate rise at Thursday’s meeting sealed, to be followed by further interest rate rises in the coming months, he said. The market is pricing in a 75bps rate rise at this week’s meeting.
“The outlook on inflation continues to be very problematic, the newsflow on inflation is unlikely to improve before the end of the first quarter next year," Mr. Dowding said. However, after an anticipated peak of inflation in the first quarter of 2023, the inflation outlook is likely to start to improve, he said.
Eurozone inflation hit a new record of 10.0% in September and is expected to rise further amid higher energy prices.
Mr. Dowding expects the ECB’s deposit rate, currently at 0.75%, to reach 2.5% in the first quarter of 2023.
Once the ECB’s rates rise into restrictive territory--a level where the interest rate sparks economic slowdown--the ECB could pause the hiking cycle, Mr. Dowding said.
Apart from the widely expected interest rate rise, he said that the ECB is likely to debate at this week’s meeting the rolling back of the generous terms of its Targeted Longer-Term Refinancing Operations, which allow banks to borrow money based on their lending patterns.
German 10-year Bund yields not far below 2.50% are close to fair value, he said. Levels above that warrant a cautious long duration stance, in contrast to the short stance BlueBay AM has previously adopted, he added.
The 10-year Bund yield is trading at 2.245% at 1035 GMT, according to Tradeweb.
However, the eurozone’s growth backdrop, exacerbated with the gas situation, is likely going to be challenging for the eurozone periphery, in particular for Italy, in the medium term, he said.
“In the medium term, we could see a return of some fragmentation risks in the eurozone," Mr. Dowding said. BlueBay AM isn’t very convinced about the ECB’s Transmission Protection Instrument, a bond purchase tool the ECB could deploy against excessive bond market volatility.
“The ECB can’t just grow its balance sheet at a time when inflation is too high," he said, adding that a more credible solution would be a closer fiscal union in the eurozone.
While Italian government bonds, or BTPs, could perform relatively well until year-end, BlueBay AM is “happy" not to have any exposure to BTPs currently. Given the longer-term challenges, BlueBay AM might consider entering short positions, however, when BTP spreads are tightening.
This story has been published from a wire agency feed without modifications to the text
