BlackRock: ECB to cut rates to below neutral in the near term
Roelof Salomons, Chief Investment Strategist at BlackRock, comments on the ECB's rate hike:
'The main surprise following the ECB’s widely expected rate cut was the relatively dovish guidance given. The direction of travel for policy rates is still down but with some obstacles along the track. The ECB may have to alter its path to navigate both tariff passthrough and fiscal stimulus in Europe – with little fresh data to light the way since its last meeting. ECB President Christine Lagarde seemed to be more concerned about risks to growth than about inflation.
The ECB dropped the reference to monetary policy being 'meaningfully less restrictive' – but explained that was due to elevated uncertainty clouding where the neutral rate is, rather than a hawkish signal. The ECB still expects inflation to hit the 2% target in early 2026. We see a risk of inflation temporarily falling below the 2% target on the back of slowing growth, stronger currency and lower commodity prices. It is important to stress that the landing zone for tariffs remains highly uncertain; strong EU retaliation could lead to weaker growth and more inflation.
Yet when running downhill, you sometimes need to keep going to prevent falling. In the near term, we see somewhat higher odds of the ECB cutting rates below neutral. We think that’s currently around 2%. But in the longer term, higher fiscal spend will increase borrowing demands and push up neutral rates. Market pricing is in line with our expectations.
The global economy has been hit by several shocks. Tariff uncertainty is yet another shock hitting both demand and supply, leading to a higher cost of capital. Europe is not immune, but a relative beacon of stability given balance sheet strength and the ability (and willingness) of policymakers to respond.
Greater unity and a pro-growth agenda across Europe could potentially boost demand meaningfully. That led us to upgrade European equities to neutral recently. We are watching how the bloc responds to shifting global dynamics and tackles its structural challenges before turning more optimistic. We note selective opportunities in financials and industries linked to defence and infrastructure spending. While inflation is well anchored, we think bond yields will eventually face upward pressure from rising term premium. We still prefer European credit.'