European money managers warn ECB rate hikes not yet over

The ECB’s single mandate of price stability makes Europe’s policymakers more likely to hike in the face of rising energy costs

Fears of further Middle East unrest have sent Brent crude up more than 10%. Picture: Carina Johansen/AFP

Some of the biggest money managers in Europe say traders are wrong to bet the European Central Bank (ECB) has finished hiking interest rates.

As a net energy importer, the region is particularly exposed to rising prices if the crisis in the Middle East escalates, and markets are underestimating the possibility of additional tightening in response, according to Legal & General Investment Management, Vanguard Asset Management and Robeco Groep. That leaves short-maturity government bonds particularly vulnerable.

The view clashes with swaps pricing that shows a pause from the ECB virtually baked in this week — and only a 10% chance of a 25 basis-point hike at a subsequent meeting. In the US, swaps show a 40% chance of another quarter-point hike from the Federal Reserve.

“Europe is of greater vulnerability here than any other developed-market bloc,” said Christopher Jeffrey, head of rates and inflation strategy at Legal & General. “The ECB is the central bank that could feel the need to overshoot.” 

At the same time, ECB president Christine Lagarde and colleagues would need to weigh the economic impact of a hike carefully, even if energy prices extend their climb. 

ECB president Christine Lagarde must weigh the economic impact of a hike carefully, even if energy prices extend their climb. Picture: Michael Probst/AP

Italy’s debt load makes the EU’s third-biggest economy especially fragile in the face of tighter policy.

Fears of a wider conflagration since Hamas’ October 7 attack on Israel have sent Brent crude up more than 10%. Disruptions to key shipping routes such as the Panama Canal and extreme weather playing havoc with the supply of food staples are adding to the factors that could keep European inflation prints hot.

The ECB’s single mandate of price stability also makes Europe’s policy-makers more likely to hike in the face of rising energy costs. Their counterparts in the Fed are charged with promoting maximum employment as well keeping prices under control.

Ales Koutny, head of international rates at Vanguard, agrees with market pricing suggesting the ECB will keep rates on hold on Thursday, but says traders are too complacent over the chance of more tightening in the coming months.

One of the arguments in favour of a pause in hikes is Italy’s fiscal situation. Additional tightening would weigh on activity and could push the nation’s risk premium even higher, risking a debt crisis.

• Bloomberg