Payden & Rygel: ECB, higher rates and bonds under pressure
By Antonella Manganelli, CEO of Payden & Rygel in Italy
The ECB's decision to raise interest rates by 25 basis points to 2.50% was widely expected and, as Christine Lagarde herself emphasized, almost a no-brainer given the inflation outlook. More interesting than the decision itself, therefore, was the tone of the press conference, which seemed slightly more dovish than expected.
The central bank is faced with a more resilient economy than expected, so much so that it has revised its growth forecasts upwards, but also with inflationary pressures that are set to remain more persistent, especially due to the energy shock. This mix, at least for now, reduces the scope for a more accommodative stance and leaves the door open for further interventions should price pressures persist.
The environment for European bond markets remains complex. The ECB's more restrictive guidance is compounded by the impact of rising commodity prices and an increasingly relevant supply issue: high levels of government issuance may put further pressure on yields through a 'crowding out' effect. In this scenario, we believe interest rate volatility may remain elevated and that the ECB will maintain a highly data-dependent approach, without committing to a predetermined rate path.
