PGIM Fixed Income: Preview of ECB interest rate decision

PGIM Fixed Income: Preview of ECB interest rate decision

25 oktober 2023

ECB
Rente (03)

Guillermo Felices, Global Investment Strategist at PGIM Fixed Income, looks ahead to the ECB's upcoming interest rate decision.

Our view is that the European Central Bank (ECB) will keep interest rates stable at their upcoming meeting on Thursday. We believe the ECB is done with hiking interest rates for the time being and that they will stay at their current rate for the foreseeable future.

Despite the Eurozone economy slowing, it still has an inflation problem. As an inflation-targeting central bank, the ECB doesn’t have much room to cut interest rates anytime soon either, even after this week’s PMI data in Europe, which clearly indicated that pressure on growth is only going to get worse before it gets better and that credit conditions across Europe are already much tighter.

The important thing to pay attention to on Thursday is whether the ECB makes any announcements relating to the management of its balance sheet. There is a risk that it accelerates its balance sheet run-off by announcing an earlier end of reinvestments of its PEPP program than previously signalled (until at least end of 2024).

The market is currently anxious about various crosscurrents – from higher for longer rates to rising tensions in the Middle East – and there is a risk that by announcing changes to its balance sheet, the ECB unintentionally creates even tighter financial conditions in markets and potentially even a financial accident. 

Given the many fragilities across markets at the moment, we wouldn’t be surprised to see weaker asset prices and wider spreads over the shorter-term. As long-term investors, we believe the environment for fixed income is a great one despite the volatility in markets. Bond yields are a lot higher and cyclical headwinds suggest value over the medium term. Bonds are also more attractive relative to equities, as bond offer yields that are now closer to those of equities (earning yields) with less volatile returns.

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