The ECB decided today to raise key interest rates by 25 basis points. Thus, the pace of the rate hike cycle has been reduced. The inflation outlook makes further rate hikes likely. Furthermore, it was announced that reinvestments in the APP portfolio are likely to be discontinued as of July.
With record rate hikes (350 basis points) since autumn 2022, ECB has faced up to the inflation problem in the euro area. Further hikes, with some uncertainty about the extent, are set. This should put ECB in good competition with the German Bundesbank of the 1970s. This makes sense in view of the still tense inflation outlook. To catch up with Bundesbank on a one-to-one basis, there is still way to go in terms of interest rate hikes. This raises the question: How many more interest rate hikes does ECB have the courage to implement?
Sources of uncertainty are not in short supply and volatility remains historically high. Most recently, turmoil in the banking sector caused many to reconsider their ECB calls. We still see inflation risks as setting the tone and do not believe that the ECB is at the end of its key rate cycle already.
Inflation and financial market stability has been at the centre of attention in western markets and will continue to be so over the next couple of months. This led to a reassessment of our key economic forecasts and, along the way, also to an update of expected asset price developments, resulting in a slightly changed forward-looking portfolio mix for global EUR investors. In this report we explain why we see equity markets neutral despite decent total return forecasts and rather prefer credit as well as money market over commodities and government bonds from developed markets.