LONDON (Reuters) - Some of Europe’s biggest money managers think the European Central Bank will be forced to shelve ambitions to hike interest rates next year, with some suspecting it might even get sucked back into bond buying if Italy unravels.
Conversations at a Reuters summit this week with top funds with trillion of euros of firepower has shown a converging view that various factors will ultimately require the central bank to sit on its hands.
The global economy is expected to soften, tensions in Italy’s debt markets are fierce again and ECB President Mario Draghi, who steered the euro zone back from the brink in 2012, is due to step down.
“I don’t expect an increase in interest rates (next year),” Pascal Blanque, who oversees 1.5 trillion euros ($1.7 trillion) for the Paris-based Amundi investment firm, said.
“Generally speaking, when there is succession at a central bank, it’s not the best time for a change in policy — especially if it’s a big one. So I would say that succession adds to the necessity of prudent fine tuning of policy.”
Stephen Jen, co-chief investment officer of London-based hedge fund Eurizon SLJ Capital, had a broadly similar view.
“I think we’re going to see an inactive ECB for much of next year versus an active Fed,” he said, adding even if the ECB was able to raise rates, they would remain deep in negative territory.
“This will mean a modestly lower euro,” adding the single currency looked to be sliding towards a $1.05-1.13 range.
The views contrast with those of the ECB chief economist, Peter Praet, who said in London this week that only a major shock would derail its plans to move towards its first rate hike since 2011 next year once it stops its bond buying program.
He was careful to stress it could always rethink if needed, but the bank’s more hawkish members from places like Germany and the Netherlands would almost certainly put up a fight.
The ECB last put up rates in 2011 — in fact it did it twice that year — but those moves also cost it a lot of credibility. Not long after the euro zone was in a full blown debt crisis that was threatening to topple not only Greece and Portugal but also Italy and Spain.
Georg Schuh, chief investment officer for EMEA at the 700 billion euro DWS asset manager, said that it was those tensions that have now re-emerged in Italy, that could force the ECB to change tack almost completely.
“The surprise for markets next year could be that the ECB is not tapering,” Schuh said. “In the end, it’s again and again only the ECB who is the backstop for any potential dangerous spread widening.”
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Reporting by Marc Jones, Sujata Rao and Helen Reid; Editing by Toby Chopra