ECB rate hold signals “new era” for economy: deVere

The European Central Bank (ECB) has signalled a slow return to normalcy by holding its official cash rate at 4.25 per cent, after it first cut rates in June.

While the central bank also indicated its next policy move is most likely to be a cut, the “forward guidance was vague and caveat-laden” according to deVere Group’s Nigel Green and other market commentary.

“Our base case scenario remains that the ECB will implement its next rate cut in September,” Green said.​

“We expect that this will likely be followed by a series of gradual 25 basis point reductions each quarter, specifically in December, March, and June. This strategic pacing aims to support economic growth while managing inflationary pressures.

“The major factor contributing to the ECB’s cautious stance is sticky services prices. Services prices, in particular, are not falling in line with other sectors, thereby sustaining overall inflation levels.

“This persistence is, we believe, due to long-term contracts, wage agreements, and the slower transmission of economic policies to the service sector compared to goods.”

Guy Stear, Head of Developed Markets Strategy at Amundi Investment Institute, agreed with Green that the next rate cut would likely come in September.​

“The ECB meeting and press conference had little impact on markets, with bond prices and the Euro-dollar cross almost unchanged after the event,” he said.

“At Amundi we expect a 25bp rate cut at the next meeting in September, and markets are also discounting a four in five chance of such a move. Although wage growth is still high and sticky, President Lagarde seems to view this as a lagging indicator of inflation pressure, and she and the council seem more worried about how economic growth is slowing.​”

Green said the ECB’s latest rate decision paves the way for a “new era” for the global economy, of which investors must remain watchful.

“Central banks are making the complex transition from the most intense interest-rate tightening cycle in recent decades to a strategic and very gradual unwinding.

“This shift marks a pivotal moment for global markets and investors, who must adapt to the evolving economic landscape and its implications for investment strategies. As central banks begin to lower rates, bond yields are expected to decrease, impacting fixed-income investments.

“Equities will benefit from lower borrowing costs, potentially driving up stock prices. However, the pace and scale of these impacts will vary based on the specific trajectories of individual central banks and individual sectors.

“Diversification and adaptive strategies will be crucial in mitigating risk in the shifting landscape. Understanding the interplay between monetary policy and economic conditions will be vital for making informed investment decisions and seizing the inevitable opportunities from the new era.”