European funds foresee potential ECB rate hikes amid energy crisis

Several leading European investment entities, including Legal & General Investment Management, Vanguard Asset Management, and Robeco Groep, anticipate further interest rate hikes from the European Central Bank (ECB) in the near future. They argue that the market may be underestimating the likelihood of such an eventuality. These institutions point to Europe’s position as a significant net energy importer and its vulnerability to rising costs due to the ongoing crisis in the Middle East.

This situation could necessitate additional monetary tightening, which could have adverse effects on short-maturity government bonds. This viewpoint contrasts with swaps pricing predictions, which currently forecast a pause by the ECB and only a 10% probability of a 25 basis-point increase in the near term. These firms, however, contend that an overshoot might be necessary considering Europe’s heightened risk.

In contrast to the ECB’s forecasted pause, swaps pricing indicates a 40% likelihood of another quarter-point increase by the Federal Reserve in the United States. The differing views on monetary policy directions between two of the world’s most influential central banks highlight the unique economic challenges each region is facing. For Europe, it is primarily the energy crisis and its implications on inflation and growth rates. Meanwhile, in the US, despite similar inflationary pressures, robust economic recovery from COVID-19 seems to be steering towards further tightening measures.

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