Central Banks in Europe Choose Divergent Policy Paths | Lord Abbett

Tracked Funds

You have 0 funds on your mutual fund watch list.

Begin by selecting funds to create a personalized watch list.

(as of 12/05/2015)

Pending Orders

You have 0 items in your cart.

Subscribe and order forms, fact sheets, presentations, and other documents that can help advisers grow their business.


Economic Insights

Surprising policy moves may exacerbate interest-rate volatility

Read time: 2 minutes

Central bank decisions are surprising markets across Europe, and investors face renewed rate volatility. There are two important pressures on central banks in Europe. First, a recent increase in natural gas prices is shifting expectations towards higher near-term inflation, thus increasing the risk of early and faster rate hikes by central banks.

Second, a market technical factor is intensifying recent rate moves. The sudden revision in near-term inflation resulted in large losses by hedge funds heavily positioned for continued, unchanged short-term rates, according to recent media reports. The unwinding of these positions exacerbated recent rate movements and caused rates to move more quickly than would be the case in the absence of this technical pressure.

The impact of these technical moves meant that when investors looked at market-based measures of future central bank action, they appeared very aggressive, warranting some backlash by central bankers themselves.

European central banks differ in their responses to all these pressures.

  1. Eastern European Central Banks – Central banks in Czechia, Poland, and Hungary all recently tightened monetary policy. They generally view inflation as more persistent than expected. As emerging market countries, they need to combat inflation more forcefully by raising interest rates and appreciating their exchange rates relative to the euro. The appreciating currencies create downward pressure on inflation. The Czech National Bank and National Bank of Poland both surprised markets in the first week of November by aggressively increasing policy rates by 125 basis points (bps) and 75 bps, respectively. Both central banks expect inflation to hit 7% this winter.
  2. The Bank of England – As opposed to both strong growth and strong inflation in Eastern Europe, the United Kingdom faces a quandary of high inflation but potentially slowing growth, a condition that generally causes headaches for central bankers. Market-based expectations of policy rates, in the eyes of the BoE, were too aggressive. Although the BoE still intends to embark on a cycle of tighter monetary policy, by keeping rates steady at its November 4 meeting and providing dovish rate guidance, the central bank effectively reduced market expectations of aggressive hikes.
  3. The European Central Bank – A sharp increase in near-term inflation also put the spotlight on eurozone short-term rates. And technical factors also caused markets to project rate hikes in 2022, far earlier than suggested by the ECB. Although markets struggled to grasp ECB President Christine Lagarde’s comments during the recent policy meeting, consistent messaging by many ECB officials over the past week and some decline in natural gas prices have caused markets to return to expectations of hikes in 2023 for the ECB. In recent days, Lagarde and ECB board members Isabel Schnabel and François Villeroy de Galhau have all denounced the idea of rate hikes in 2022.

What might investors take away from this seeming disconnect? Increasing doubts about the true extent of transitory inflation in Europe and elsewhere create vulnerabilities for markets and increase rate volatility (Figure 1), underscoring the usefulness of rate volatility as an asset class for hedging inflation exposure. Amid this uncertainty, investment strategies that seek to reduce duration, or provide inflation protection with limited duration, may prove appealing.


Figure 1. UK Rate Futures Signal Europe’s Interest-Rate Uncertainty
Sterling 90-day future curves for indicated dates

Source: Bloomberg. Interest-rate futures are futures contracts based on interest-bearing financial instruments. This futures contract can be cash-settled, or it can involve the delivery of the underlying security.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.


Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

Market forecasts and projections are based on current market conditions and are subject to change without notice.

Projections should not be considered a guarantee.

Equity Investing Risks

The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies.

Fixed-Income Investing Risks

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. 

The credit quality of fixed-income securities in a portfolio is assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness. Ratings range from ‘AAA’ (highest) to ‘D’ (lowest). Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

Glossary & Index Definitions

A basis point is one one-hundredth of a percentage point.

This material may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The views and opinions expressed are as of the date of publication, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions, and Lord Abbett disclaims any responsibility to update such views. Lord Abbett cannot be responsible for any direct or incidental loss incurred by applying any of the information offered.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

Please consult your investment professional for additional information concerning your specific situation.

This material is the copyright © 2021 of Lord, Abbett & Co. LLC. All Rights Reserved.  

Important Information for U.S. Investors

Lord Abbett mutual funds are distributed by Lord Abbett Distributor LLC.


The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state, and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

Important Information for non-U.S. Investors

Note to Switzerland Investors: This is an advertising document.

Note to European Investors: This communication is issued in the United Kingdom and distributed throughout Europe by Lord Abbett UK Ltd., a Private Limited Company registered in England and Wales under company number 10804287 with its registered office at Tallis House, 2 Tallis Street, Temple, London, United Kingdom, EC4Y 0AB. Lord Abbett UK Ltd (FRN 783356) is an Appointed Representative of Duff & Phelps Securities Ltd. (FRN 466588), which is authorised and regulated by the Financial Conduct Authority.



Please confirm your literature shipping address

Please review the address information below and make any necessary changes.

All literature orders will be shipped to the address that you enter below. This information can be edited at any time.

Current Literature Shipping Address

* Required field