MFS: ECB delivers not-so-forceful rate hike
Annalisa Piazza, Fixed Income Portfolio Manager at MFS, comments on the ECB's rate hike:
'The ECB raised all three policy rates by 25bp, taking the deposit facility rate from 2.00% to 2.25%, and, as expected, retained its meeting-by-meeting approach. Our baseline remains for one further rate increase in September, followed by an extended pause, unless evidence of second-round effects emerges — for example, if wage growth accelerates more materially than currently anticipated. ECB president Lagarde noted that some increase in employee compensation has already been incorporated into the ECB’s assessment.
Uncertainty remains elevated, with risks to growth tilted to the downside and risks to inflation tilted to the upside. The ECB’s updated forecasts point to a more persistent inflation backdrop alongside weaker growth, underscoring the difficult trade-off facing policymakers. While inflation is still expected to ease over time, the softer growth outlook reflects the economic drag from higher commodity prices, pressure on real incomes and fragile confidence. In our view, even this revised growth path may prove too optimistic, with survey data suggesting further moderation ahead.
Overall, the decision was broadly in line with expectations and the communication was balanced. While Lagarde appeared reluctant to frame the move as an ‘insurance’ hike, the relatively measured step nevertheless seems intended to contain inflation expectations and reduce the risk of more forceful tightening further ahead.'