ECB is likely to repeat implicit message on potential interest rate rise in 2022
Summary
ECB’s main focus is likely to be on the tapering pace of the Asset Purchase Programme, Xavier Baraton, global chief investment officer at HSBC Asset Management, said
The European Central Bank is expected to reiterate an implicit message on a potential interest rate rise as early as this year at its March monetary policy meeting, but the main focus is likely to be on the tapering pace of the Asset Purchase Programme, Xavier Baraton, global chief investment officer at HSBC Asset Management, said.
“March is still too early for the ECB to focus on rate hikes per se," Mr. Baraton told Dow Jones Newswires in an interview. “However, opening the door for an interest rate rise over the coming year, with short-term policy rates returning to zero over the next 12 months, will be the implicit message," he said.
At its February policy meeting, the ECB warned about rising inflation risks, cautiously opening the door for an interest-rate rise in 2022.
Money markets are currently pricing in almost two deposit rate increases by the ECB for 2022, with a 25 basis point rise forecast in September and a second, somewhat less than 25 basis point hike envisaged between year-end and early 2023, Mr. Baraton said. But this pace is too quick, he said.
“On balance, we are still in the camp of one rate hike this year."
The ECB is making its decisions according to how the more persistent aspects of inflation will materialize over the coming months, Mr. Baraton said. The ECB’s focus is on core inflation, which excludes volatile items such as food and energy, which the central bank expects to decline at some point in the second half of 2022, he added.
The headline eurozone inflation was 5.1% in January, while the core inflation was 2.3%.
“The main message from the ECB is that they want more flexibility this year, so they can adjust policy more quickly if inflation continues to surprise on the upside, but maintain accommodative conditions if growth disappoints or if core inflation starts to move towards the inflation target at the desired pace," he said.
The prospect of monetary policy tightening by the ECB, coupled with expectations that the U.S. Federal Reserve could start raising rates in March and start reducing the balance sheet in the summer, has pushed eurozone government bond yields significantly higher. The eurozone benchmark 10-year German Bund yield has risen above 0.30% earlier in February and it last traded at 0.21%, according to Tradeweb.
The frontloading of policy tightening by the Fed puts upward pressure on global yields, and “we believe this should help maintain 10-year Bund yields in positive territory," he said, adding that this is more a price adjustment rather than a new trend.
The low-for-long yield environment should continue as the ECB will reinvest proceeds from maturing bonds even after the end of net asset purchases, while the scarcity of safe assets, such as German Bunds in particular, will ensure long-term demand for Bunds, he said.
“This will keep German Bund yields at low level, even if in positive territory," Mr. Baraton said.
HSBC AM had $619 billion in assets under management as of Sept. 30.
