Unsurprisingly, the European Central Bank raised its key interest rates by 0.75% to 2.0%. The manœuvre aims to counter inflation, which, at 9.9% in September for the euro area, remains very high and, what is more, is spreading to all sectors of the economy. In turn, the underlying rate (excluding energy, food, tobacco, and alcohol) reaches the highest level in several decades at 4.8%.
The ECB is making credit more expensive to slow down demand. While monetary policy can do little to counter soaring energy and food prices, essential goods for the consumer, it can slow down demand for other goods and services, reducing average inflation. However, by making credit more expensive in an environment marked by an evident loss of household purchasing power, the European Central Bank risks precipitating severe household financial problems.
At first glance, States would like, as far as possible, to help households and businesses, as France and Germany do. But many are heavily indebted, and as rising interest rates increase debt charges, their room for manoeuvre is minimal.
Tensions between the political world and the ECB should become palpable in the coming months. While waiting for this increased pressure, the markets wanted to read that the ECB says it has made considerable progress in normalising its monetary policy, indicating that the upward movement in rates will soon be over. This explains the fall in interest rates on the European bond market following this announcement.
However, with inflation at current levels and the gradual rise in the underlying rate, a measure par excellence of the effect of contagion on the whole economy, the ECB’s room for manoeuvre remains very limited.
We expect zero growth for 2023, and a recession in the eurozone seems inevitable. Given these bleak prospects, we are no longer investing in eurozone equities as part of our diversified portfolios.