London – The European Central Bank will not raise rates in Europe until 2018 at the earliest as the region continues to face a series of headwinds, Kames Capital has said.
John McNeill, co-manager of the Kames Absolute Return Bond Global Fund, says while the market is starting to price-in an interest rate hike in 2017 for the eurozone, this timeframe is unrealistic especially given recent events in Greece.
Instead, he sees the recovery – and inflation – taking far longer to become entrenched to the point where they require such policy action, with the ECB currently focused on its quantitative easing operation.
“The market has started to price-in interest rate rises from the ECB by the end of 2017, but we believe this is too early,” McNeill said.
“Given the region is still in easing mode, and inflation is non-existent, it will take a number of years until the ECB can start to tighten.”
The Greek crisis continues to rumble along, and McNeill said this was a further reason for the ECB to postpone any rate hikes.
“Geopolitical risks that were bubbling under the surface have drawn more attention recently, such as the current Greek crisis and the volatility in China,” he said.
“This means bond markets in Europe have retraced by more than those in the UK and US, as the unwinding of investor positioning for ECB quantitative easing exacerbated the flows.”
McNeill said this more extreme move in eurozone yields means playing the ECB QE trade once again looks attractive.
“In core Europe, following this unwinding, we have opened up a trade specifically to benefit from ECB QE, without being outright long the market,” he said.
The fund is buying 30-year German bunds versus a short in 30-year euro swaps, in the expectation that – given the ECB’s bond buying programme – bunds could be in high demand.
“The supply calendar in the summer is very restricted, and coupled with the need for the ECB to accelerate purchases, it should drive the bonds higher relative to the swaps,” he said.