Investment experts across Franklin Templeton and SIMs provide their perspectives on the impact of today’s ECB rate decision
David Zahn, Head of European Fixed Income at Franklin Templeton
“The European Central Bank (ECB) cut interest by 25bps to 3.5% as anticipated by the market. We continue to see the ECB cutting rates until they get to a neutral stance around 2% probably at a pace of once a quarter with the next cut in December. However, the new macro forecasts released were interesting in that they probably continue to overestimate growth over the next couple of years and will see continued revisions down in the coming forecasting cycles. The ECB rate cutting cycle could accelerate if growth continues to disappoint.
Overall, the ECB rate cutting cycle continues to be supportive for European Fixed Income markets. Longer dated bonds should become even more attractive if the market starts to believe the ECB is behind the curve.”
William Vaughan, Associate Portfolio Manager at Brandywine Global
“The ECB’s decision today to cut rates and to trim its growth forecast by 0.1% annually through 2026, while keeping its inflation outlook largely unchanged, signals that this current position is likely to continue for some time. European Manufacturing PMIs are clearly entering a downward trend. While the services sector has kept overall composites stable, there’s little evidence to suggest this can be sustained in the long term.
China’s fragmented approach to stimulating demand, combined with its leadership in affordable electric vehicles, hasn’t resulted in the anticipated rebound for European manufacturing. Draghi’s recent report underscores some of the Eurozone’s key challenges, but spending over EUR700 billion annually, as suggested, seems unrealistic given the current political climate. Without significant fiscal shifts, it’s hard to envision a major growth catalyst emerging in Europe anytime soon.
Taking these factors into account, we hold a preference for European fixed income in the coming months. The US outlook remains uncertain, especially with increased fiscal borrowing and the upcoming election, making EU and UK bonds more appealing compared to the US.”
Kim Catechis, Investment Strategist at the Franklin Templeton Institute
“The ECB cut the key deposit rate by 25bps to 3.5%, as expected, as inflation continues to weaken. If economic growth does not strengthen, the ECB is likely to continue cutting rates, weakening the Euro against the US Dollar and making EU exports more competitive.
The EU needs to re-energize its economy, as it is uniquely challenged by a combination of weak sovereign finances and potential trade wars with its two biggest trading partners, China and the US (depending on the outcome of the US elections). Despite the recent rates repricing, we still believe that if the slowdown continues, there’s a chance the ECB could turn even more dovish than the markets currently expect, confirming our bullish view on a diversified portfolio of European bonds.”
