PIMCO: Is ECB going towards restrictive?
Following yesterday’s ECB meeting, Konstantin Veit, Portfolio Manager at PIMCO, comments:
- As widely anticipated, the ECB today hiked the deposit facility rate (DFR) by 25bps, to 2.5%.
- On the back of the renewed spike in energy prices, the market currently expects an ECB terminal rate of around 3.25%.
- We believe risks are skewed towards fewer hikes but acknowledge exceptionally high uncertainty.
- While hiking in June and September has been agreeable to all Governing Council members, going further would probably split the group and faces a higher bar.
- Additional hikes would take policy rates above the upper bound of the ECB's neutral rate estimates, and would likely require higher energy prices for longer, evidence of second-round effects in wages, or a de-anchoring of inflation expectations.
- Should the data turn hawkish down the line and Governing Council agreement to move policy rates into restrictive territory takes shape, we could see additional back-to-back rate hikes starting as early as December.