The European Central Bank once again raised interest rates by 25 basis points, in what money managers expect will be the last hike in the cycle.
The governing council of the ECB decided to raise the ECB's three key interest rates by 25 basis points each. The central bank revised upward its projections for average inflation in 2023 to 5.6%, vs. a 5.1% forecast communicated in June; and to 3.2% for 2024, up from 3% in June. The 2025 inflation projection was revised downward to 2.1% from 2.3%. The upward revisions mainly reflect "a higher path for energy prices," a news release said.
The ECB said interest rate increases "continue to be transmitted forcefully," and, as such, the ECB revised downward its projections on eurozone growth in 2023 to 0.7%, vs. 0.9% in the June communication; by 1% in 2024, vs. 1.5% previously; and by 1.5% in 2025, down from 1.6%.
"The governing council's future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary," the ECB added.
Money managers largely expect the September hike to be the ECB's last, with interest rates on the main refinancing operations, marginal lending facility and the deposit facility at 4.5%, 4.75% and 4%, respectively, starting Sept. 20.
"Although the ECB didn't quite explicitly say 'we are at peak,' the change in guidance effectively points in that direction in our view," said Peter Goves, head of developed market debt sovereign research at MFS Investment Management, in an emailed comment. "We likely have rates on hold ahead of us now as opposed to ongoing hikes in our view. In other words, unless there is a decisive change in prevailing data trends, we think the ECB is more or less done."
The governing council's decision to increase "was a knife-edge decision," said Hussain Mehdi, macro and investment strategist at HSBC Asset Management, in an emailed comment. "Ultimately, however, lingering inflation and a robust labor market trumped considerations of a clearly stalling economy."
HSBC executives believe "there is a very good chance this is the last rate hike for the ECB," Mehdi said. "Policy is now at highly restrictive levels and leading indicators remain consistent with the bloc entering recession. Core inflation pressures are moderating on a sequential basis. International factors such as the Fed being in pause mode and China's macro challenges may also influence the ECB's stance at upcoming meetings."
And Seema Shah, chief global strategist at Principal Asset Management, said in a comment that the revised forecasts by the ECB "lay bare the tough dilemma facing the central bank: downward revisions to growth, but upward revisions to inflation. Yet, while this confusing picture set the backdrop for what was probably a heated debate within the governing council, future decisions will likely be more clear-cut. Indeed, although the ECB has left the door slightly ajar for further tightening, the fact that recession risks are rising once again likely means that this is the final hike," she said.
