The European Central Bank’s deposit rate will top 3.5% after another 1.5 percentage points of hikes, according to more than a third of 201 investors in the latest MLIV Pulse survey. An additional 15% see it heading to 4% or above, which would be a record level. That helps explain respondents’ strong conviction that euro area bonds will underperform US Treasuries this year.
There’s been no lack of warnings for investors from policy makers: ECB Governing Council Members Olli Rehn and Pablo Hernandez de Cos are the latest to say there are still “significant” rate rises ahead. “I think there’s a non-trivial probability TPI will be used, if you think about raising rates and the massive supply coming,” said Greg Peters, co-chief investment officer at PGIM Fixed Income. “They can’t afford to have Italian spreads blown out.”
The economic outlook has recovered so much that Goldman Sachs Group economists no longer predict a euro-zone recession for 2023. They nowgross domestic product to grow 0.6% this year, compared with an earlier forecast for a contraction of 0.1%.