Money managers said tail risks for bond investors are declining as the European Central Bank delivered another rate hike to bring inflation under control.
The ECB's governing council increased the European Union's key interest rates by 25 basis points Thursday. The interest rate on the main refinancing operations will increase June 21 to 4%, the rate on the marginal lending facility will increase to 4.25%, and the rate on the deposit facility will increase to 3.5%.
The 25-basis-point increase was a reflection of the revised projected outlook for inflation, said Christine Lagarde, ECB president, in a news conference. "Inflation has been coming down, but it is projected to be too high for too long," Ms. Lagarde said.
The Eurosystem data show that headline inflation will average at 5.4% in 2023, 3% in 2024 and 2.2% in 2025.
"Tail risks for bond investors are declining as the ECB continues its rate rising path to improve inflation dynamics," said Clemence Dachicourt, senior portfolio manager at Morningstar Investment Management, in an emailed comment about the rate decision. "Having said that we are clearly not out of the woods yet and the markets may have gotten ahead of themselves in pricing much better inflation outcomes."
"Central banks are still having to walk a tightrope balancing increases in interest rates to control inflation with potential risks of precipitating the economy into a deep recession," Ms. Dachicourt added.
Gurpreet Gill, macro strategist, global fixed income at Goldman Sachs Asset Management, added in a separate emailed comment: "Although economic activity remains resilient, tighter monetary policy appears to be transmitting into financing conditions and underlying inflation pressures have started to ease. Further, a slowdown in headline inflation should eventually feed through to lower inflation expectations and wage demands."
"We therefore think the ECB tightening is in its home stretch and expect a final 0.25% rate hike in July for a terminal rate of 3.75%," Mr. Gill said.
Other managers agreed that Thursday's hike could be the next to last. Altaf Kassam, Europe, the Middle East and Africa head of investment strategy and research at State Street Global Advisors added: "As opposed to May's 'dovish' hike, which clearly took into account the effects of the banking crisis to downshift from 50 basis points, today's decision had a distinctly hawkish feel, with the ECB keen to persuade the market that a peak in core inflation would not immediately imply an inflection in interest rates."
The ECB's communication pointed at a likely increase at the meeting in July, and also repeated previous emphasis that policy will remain tight for a long time
"Thus, risks to the ECB monetary policy outlook remain to the upside, but with increasing uncertainty. The lack of clear indication that the hiking cycle will end in July may encourage the market to price out some of the implied 2024 rate cuts," Mr. Kassam added.
