Portfolio Adviser • Portfolio Adviser Magazine February 2022 • ECB keeps rates on hold as inflation soars

▪ European Central Bank has not followed other central banks in tightening policy as response to rising inflation

▪ Investors await ECB March update with interest as bank’s failure to act is seen as putting European recovery at risk

The European Central Bank (ECB) has been accused of trailing other major central banks by failing to start tightening policy, despite inflation in the eurozone hitting record highs.

A little under an hour after the Bank of England (BoE) announced on 3 February it was raising rates for the second time in a row, the ECB confirmed no change to its -0.5% deposit rate or its bond-buying programme.

Central banks in major developed markets have all taken flak for communication missteps around inflation.

It was only in November 2021 that Fed chair Jay Powell finally retired “transitory” as a descriptor for the fast pace of price increases, at which point the US Consumer Price Index had already soared above 6%. As of December, it hit 7%.

Governor of the BoE Andrew Bailey was accused of playing the “unreliable boyfriend” in November due to his confusing communication, after publicly signalling a potential rate lift-off , only to double back.

But in intervening months, rampant inflation has forced both central banks to begin quantitative tightening.

Similarly, president of the ECB Christine Lagarde has been caught out by the latest inflationary data points, prompting her to adopt a much more aggressively hawkish tone. A day before the ECB meeting, it was revealed consumer prices in the eurozone rose by a record 5.1% in January.

She admitted during a press conference the ECB had “unanimous concerns” about the swift rise in prices and left the door open for a rate hike in 2022.

The U-turn spooked markets, triggering a sell-off in sovereign bonds and pushing the Euro Stoxx down 1.9% by close of trading. Meanwhile, the euro jumped t o a two-week high against the dollar.

The ECB’s reticence to raise rates has perplexed investors. “While the BoE decided to act today, the ECB has just shown it is behind the curve when it comes to responding to the sharp rise in inflation,” said Paul Craig, portfolio manager at Quilter Investors.

“Just this week, we saw eurozone inflation spike to record highs and pile the pressure on Lagarde to push ahead with interest rates. They, however, continue to resist and risk causing themselves a further inflation headache given the euro is also depreciating.

“Failing to acknowledge inflation now risks greater action required later, which could stall the recovery.”

All eyes will now be on the March meeting when the ECB will have fresh growth and inflation predictions and assess the pace of its asset purchases.

Kempen Capital Management senior investment strategist Joost Van Leenders said Lagarde has consistently based decisions on conditionality.

He said: “Lagarde repeatedly said the ECB will not hike rates before ending asset purchases, so the assessment in March will be closely looked at. Lagarde’s press conference felt like she was preparing markets for a significant change in March.

▪ Justin Onuekwusi (pictured) has been promoted to the newly created role of head of retail investments at Legal & General Investment Management (LGIM). He was previously head of retail multi-asset funds. The appointment is a strategic one as LGIM looks to drive and evolve its investment proposition and deliver a scalable and profitable retail business.

▪ Federated Hermes’ head of fixed income Andrew Jackson has left the company. He joined in April 2017 from Cairn Capital, where he was chief investment Officer. His next role is yet to be confirmed.

▪ Janet Mui has been named head of market analysis at Brewin Dolphin. The promotion comes 18 months after Mui joined the wealth manager as investment director. Her role will also involve building brand awareness and increasing her presence “as a leading voice in the industry”, Brewin said.

▪ Aviva Investors equities boss David Cumming has resurfaced at Newton Investment Management. He left Aviva’s asset management arm last June amid a major cost-cutting restructure of its equities desk. He will join Newton’s £2.6bn UK equity team in early March and report to chief investment officer of equities John Porter. There he will manage the £1.1bn BNY Mellon UK Income Fund.