Morgan Stanley Says ECB Rate Hikes Are Over

(Bloomberg) -- Morgan Stanley thinks the latest economic figures mean the European Central Bank will not hike interest rates any further.

Data this week showing services inflation slowing in the euro area followed on from signs of a rapidly deteriorating economy, which is likely to tip the balance for policymakers in favor of a pause this month, economists at the US investment bank said. They previously saw one more increase in September, but now expect July's ninth consecutive rate hike to have been the final one. 

“We change our ECB call and expect a pause in September,” wrote economists including Jens Eisenschmidt in a client note. “We now see the terminal rate at 3.75%.”

A halt this month in a historic hiking cycle chimes with the latest bets in money markets, where traders have cut the odds of a quarter-point move to about one-in-four. But it contrasts with market wagers still favoring another increase later this year to a peak of 4%.

Eisenschmidt and his colleagues noted the drop in services inflation in August to 5.5% from 5.6% previously could become a crucial factor in supporting a thesis that a peak in core inflation — which strips out the more volatile components such as energy and food — is now in the past. 

Stagflation Dangers Stalk Europe as Markets Eye End to Hikes

The bank believes the macro backdrop is turning particularly favorable for real yields — which strip out inflation, given the “decreasing risk of persistent inflation as we approach the end of the ECB tightening cycle.” That's leading their strategists to recommend owning French inflation-linked debt maturing in 2031.

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.