BlackRock is betting that a flagging economy will curb the European Central Bank’s ability to raise interest rates over the next 18 months as soaring food and energy prices squeeze consumers in the eurozone. Faced with record-high inflation, the ECB is on Thursday expected to lay out plans to end eight years of bond-buying and negative interest rates as it charts a course away from coronavirus pandemic-era stimulus policies. However, investors have gone too far in anticipating a series of aggressive rate increases that would take the ECB’s deposit rate to 2 per cent by the end of 2023, from the current all-time low of minus 0.5 per cent, said Michael Krautzberger, who oversees active fixed income strategies in Europe at the $10tn asset manager. The ECB is right to address inflation, said Krautzberger, after consumer prices climbed to 8.1 per cent in May — but a fragile economy and the sensitivity of government borrowing costs in highly indebted eurozone members to higher interest rates are likely to slow the pace of tightening.

“I would say this is a good opportunity for the ECB to end [its bond-buying programme] and negative rates,” he said. “But after that I think they may need to slow down. The situation argues for going quite carefully.” BlackRock has entered money-market wagers that the pace of rate increases will slow in 2023 following lift-off this year. The group is also considering buying two-year German bonds as a bet on a slower rate of tightening, Krautzberger said. He added that cracks appearing in the economy even before borrowing costs have begun to rise suggest the eurozone will have a limited tolerance for higher interest rates, which will drive up mortgage costs. “Consumer confidence in the eurozone is almost at all-time lows,” Krautzberger said. “So are forward-looking components of sentiment surveys. Hikes will have a massive impact on the property market.” The expectations component of the Sentix survey of investor sentiment fell to its lowest level in a decade in June, according to figures published this week. “The underlying problem in [the past] 15 years was that Europe was not able to sustain growth of 2 per cent,” Krautzberger said. “Inflation has increased much more than the market expected and much more than I expected.”

He added: “If you look at the reasons why inflation is so high the majority are really bad for growth — an increase in oil and food prices, and broken supply chains. I don’t think there is anything signalling that the European growth malaise has been overcome for good.” In a sign that the ECB is concerned about the potential for higher rates to provoke a bond market sell-off, the central bank on Thursday is set to strengthen its commitment to a new scheme to support the debt of vulnerable countries such as Italy with fresh purchases. The gap between Italy’s 10-year borrowing costs relative to Germany’s — a closely watched barometer of bond market stress — has doubled over the past eight months to more than 2 percentage points.