The European Central Bank met expectations with a 25-basis-point rate hike amid slowing inflation in the eurozone, leading managers to forecast that the end of the bank's tightening cycle is near.
The governing council of the ECB increased the three main interest rates in the eurozone: the main refinancing operations rate was increased to 4.25%, the marginal lending facility rate was increased to 4.5%, and the interest rate on the deposit facility was increased to 3.75%, all effective Aug. 2.
While ECB President Christine Lagarde highlighted that there is an expectation that eurozone inflation will drop further over the rest of the year, from 5.5% in June, she said underlying inflation remains high overall. "Our past rate increases continue to be transmitted forcefully: Financing conditions have tightened again and are increasingly dampening demand, which is an important factor in bringing inflation back to target," which is 2%, she said in a press conference.
Managers said they expect the rate-hiking cycle to be near an end, since the ECB's efforts are starting to bring inflation down.
With recent activity surveys suggesting the economic slowdown is affecting manufacturing and services within the eurozone, "this points towards the ECB nearing the end of its rate-hiking cycle, but the persistency in core inflation also tells us rate cuts are not on the agenda for now," Clemence Dachicourt, senior portfolio manager at Morningstar Investment Management, said in an emailed comment.
Managers now will be watching upcoming data.
"In our view, it now all depends on the central bank's economic growth and inflation projections in September as to how monetary policy should proceed," Ulrike Kastens, Europe economist at DWS Group, said in an emailed comment. "Although sentiment indicators are weakening significantly, inflation has not yet been defeated, especially since no relief is coming from wages and the labor market. We therefore continue to expect the key interest rate to be raised to 4% in September."