Following the latest ECB interest rate decision to cut interest rates for the third time this year which was announced today, investment experts and strategists have been sharing their reaction to the news with us as follows.
Konstantin Veit, Portfolio Manager at PIMCO said: “As we expected, the ECB cut the deposit facility rate by 25 basis points, to 3.25%, and refrained from committing to a certain rate trajectory. While the macroeconomic backdrop is somewhat weaker than previously expected, risk management considerations seem to have played an important role.
“Upside shocks to inflation could be addressed by a slower pace of rate reductions, while today’s cut is seen as offering additional protection against downside risks.Given still elevated domestic inflation, largely reflecting price pressures in the services sector, monetary policy will remain tight for now.
“The data flow over the coming months will decide the speed at which the ECB continues to make policy less restrictive. We expect a Governing Council discussion around the appropriate neutral policy rate configuration next year, when the policy rate falls below 3%. We think the ECB will cut again in December, and the terminal rate pricing of around 1.85% for the second half of next year looks reasonable to us.”
Lindsay James, investment strategist at Quilter Investors shared her reaction to the news saying: “The European Central Bank has announced its first back-to-back interest rate cut in 13 years with another 0.25% reduction – the third so far this year. With inflation now sitting well below the ECB’s target and economic growth still sluggish, markets had been expecting the Bank would continue on its path of rate cuts.“
“Eurozone harmonised inflation fell to 1.7% in September, revised down from the initial estimate of 1.8%, marking the first time since June 2021 that annual inflation has fallen below the ECB’s 2% target. Growth has remained sluggish, and there is increasingly obvious pressure on the European economy. Germany in particular has downgraded its growth forecasts amidst an ongoing manufacturing downturn.
“Weak consumer confidence is also weighing on the economy, and we have seen a step change in household savings despite wages continuing to outpace inflation. Europeans are now saving more than they were before the pandemic, with an average of 15.7% of household income being squirreled away in the three months to June compared to 12.3% pre-pandemic.
“At the last ECB monetary policy meeting, officials signalled that the third rate cut would be unlikely to come until December. Since then, however, the data has shown the economy has weakened further, and this has clearly had an impact on their decision making. The economy is in desperate need of stimulus, and the ECB will be hoping this third rate cut will begin to make a difference. Today’s news will at the very least bring some relief to consumers and businesses which could boost confidence and subsequently help towards the economic recovery.
“Looking ahead, the ECB will be keeping an extremely close eye on the data that comes out before its December meeting. It will be pleased that inflation has finally come in lower than target, but keeping the economy afloat will be its next challenge.”
Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, said:
“The market reaction to the ECB’s rate cut decision is muted, as it was widely expected and fully priced in by the bond market. The forward guidance remains unchanged as well. The ECB has refrained from an outright dovish stance, as there is still a little concern about underlying inflation and elevated wage growth. But we think the ECB will have to focus more on the economic headwinds facing the euro area, including the loss in momentum in its largest economies, Germany and France. We believe the ECB will continue to deliver a series of consecutive rate cuts through to at least mid-2025, as growth concerns will dominate rather than inflation.”
Patrick O’Donnell, Senior Investment Strategist, Omnis Investments said: “As expected, the ECB cut interest rates by 0.25%. This was hardly a surprise, given that recent data has shown that inflation, the PMIs and wages have been undershooting where the rate-setters would ideally want them to be. In addition, there had been a meaningful shift in tone from the more hawkish Governing Council members since the last meeting in September. Key to look for in the press conference will be to what extent a meeting-by-meeting approach is still viewed as appropriate, which given recent data, would be seen as relatively hawkish by markets.“
Jim Gott, Head of Asset Surveillance, Mount Street comments: “Today’s decision was expected, given the stagnating European economy and falling inflation. Germany, the continent’s economic powerhouse, is clearly struggling, while the likes of Spain and Italy have been more resilient. This shift is evident in the uptick in Commercial Real Estate deals in southern Europe, which is a complete reversal from 2012. There remains a major economic imbalance in the Eurozone – German GDP growth is lagging behind other major European economies, whilst its debt balance is also lower – which continues to pose a challenge for the ECB. Whilst the whole Eurozone will benefit from today’s rate cut, the impact on the German economy is likely to be minimal.”
Felix Feather, economist at abrdn, said:
“The ECB’s decision to cut rates by 25bps today comes as no surprise. While it declined to pre-commit to further cuts, we think the ECB’s framing of the decision reinforces our expectations for three further cuts by March 2025. An inflation shock arising from Middle East-related tensions could prompt the ECB to move more cautiously. On the other hand, it could cut rates more aggressively if the bloc falls into recession.”
Well done Christine says Nick Chatters, investment manager at Aegon Asset Management as he comments “My view here is that Largarde has sensibly acknowledged the weakness in the inflation and activity data, without setting the market into a panic that the risks are anything more than tiled to the downside. Well done Christine! She also noted that they certainly do not see a recession, so soft landing here we come.”
Laura Cooper, Global Investment Strategist at Nuveen comments:
The ECB pivoted from its cautious policy stance with a 25bps rate cut coming only a handful of weeks after raising doubts that another reduction this month would be needed. But there were sufficient signs of weakness to warrant the move, most notably recent PMI prints pointing to the weight of restrictive rates.
Laura also relayed on the Nuveen team view on the decision saying: “The data-dependent approach from the ECB, with no pre-determined policy path, will do little to deter a dovish December cut.
“In our view, the balance of risks has tilted to the downside, cemented by a deteriorating economic backdrop and softening services inflation.
“While a dovish read from a disinflationary process ‘well on track’, key to watch for the path forward will be whether policymakers focus on the persistence of services price pressures or show more conviction that easing wage prospects will guide inflation lower. On growth, any hints of emerging bright spots, like those gleaned from the ECB bank lending survey, could be tempered by the need to grind to neutral more quickly in a race to avert a recession. All in, downward revisions to forecasts in December should accompany more easing, continuing with consecutive 25bps rate cuts through to March. It’s then that upside growth risks from rising real incomes, spillover from China stimulus, and a nascent inventory cycle upswing could warrant another policy pivot, this time a pause around 2-2.5%.
“But for now, with French political frictions playing out in wider spreads and German weakness becoming more entrenched, a defensive investment stance is prudent. We are leaning into EGB duration, continue to see value in German bunds and select periphery exposures like Italian BTPs for attractive carry, though fading EURUSD weakness and cyclical equity exposures as US election uncertainty looms”.
David Zahn, Head of European Fixed Income at Franklin Templeton, comments:
“Today’s rate cut of 25 basis points by the European Central Bank is in response to weak economic indicators and falling inflation below 2%.
“With slow growth across Europe, the ECB will continue their rate cutting cycle to below 2% by mid-2025.
“Looking ahead to December, the ECB is expected to cut rates again by 25bps to continue to address slow economic growth and below target inflation. There are signs that inflation might rebound as we head into late 2024 which could lead the ECB to adopt to a more cautious approach in its rate easing cycle. However, that could be seen as an error as inflation will move back below target in 2025, further supporting interest rate cuts.
“With this monetary back drop, European fixed income looks attractive as there should be a supportive central bank for some time.”
Richard Flax, Chief Investment Officer at Moneyfarm, said:
“The ECB has taken bold action by cutting interest rates by another 25 bps, marking its second consecutive cut and the third reduction this year. The ECB moved ahead of the Federal Reserve and the Bank of England with its decision to lower rates, reflecting its confidence that inflation risks have significantly diminished while the growth outlook has weakened.
These back-to-back rate cuts, the first in 13 years, underscore the ECB’s serious concerns about the sluggish economic growth, particularly in Germany. The focus has clearly shifted from managing inflation to reigniting growth.”
ECB cuts rates as expected, markets want more insight from Lagarde
According to Daniela Sabin Hathorn, senior market analyst at Capital.com, markets want more insight from Lagarde saying: “The ECB has cut rates by 25 basis points in October as widely expected. The reaction in markets has been slightly muted as the decision was fully priced in prior to the meeting. EUR/USD saw a small kneejerk reaction higher after the decision was announced as the accompanying statement did show some hawkish remarks on inflation, but nothing unexpected given Lagarde’s previous commentary.”
Jochen Stanzl, chief Market Analyst at CMC Markets said:
“The European Central Bank (ECB) has taken no action in its interest rate decision today that might unsettle investors. The DAX has climbed back above 19,500 points, and the Eurostoxx 50 also found back its footing. If Christine Lagarde’s tone in the press conference matches the sentiment of the ECB’s statement, then it’s likely that volatility will remain subdued. Traders might be left behind empty handed if they expected the ECB to cause much volatility.
Inflation in the Eurozone has fallen below 2%, but it could rise again by the end of the year. Many wage negotiations are still ongoing, and the ECB is waiting for more data. Wage inflation is particularly problematic for the ECB, as it leads to rapid increases in rents, healthcare costs, and other service expenses.
Moreover, within the ECB’s Governing Council, Germany and Austria are the ones holding back when it comes to a quicker reduction in interest rates. A faster rate cut could benefit Germany’s economy, but the ECB’s mandate is not as broad as that of the US Federal Reserve. It focuses solely on inflation, not employment. As a result, the ECB must prioritise wage negotiations over the potential job losses at major corporations like Volkswagen or Thyssenkrupp.
The ECB is therefore likely to only commit to a specific rate path if inflation in the services sector genuinely stabilises. Until then, it will continue to wait and see. Investors will likely remain in the dark ahead of each upcoming meeting, with no guarantee of further rate cuts nor a surprise reduction of 50 basis points.
Overall, the ECB’s decision is positive news for investors. Just a few weeks ago, this rate cut wasn’t expected. Investors now find themselves in a broadly positive environment, with the ECB supporting the bullish mood rather than obstructing it.”
