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The ECB Keeps Its Word And Raises Rates

The turbulence on the financial front did not prevent the ECB from raising its key interest rates by 0.5% once again. But it is still determining the future trajectory.

By EC Invest

At its monetary policy meeting in early February, the ECB announced a 0.5% increase in key interest rates, but also - and this is rare - that it intended to do the same at its March meeting.

It is now done; Christine Lagarde and her colleagues have previously pushed their primary key interest rate to 3.5% against 3.0%. So naturally, the fight against inflation remains the main priority of our monetary authorities. Indeed, inflation has been slightly downward in recent months due to the fall in energy prices. But inflation, excluding energy and food, continues to rise, a sign that the extreme price rise is well anchored everywhere in our economies and will be difficult to curb.

Caused by the general rise in interest rates, which leaves banks facing significant losses on their bond portfolio, the problems of SVB Bank and the American banking sector were not enough to alter the rate trajectory imagined by our monetary authorities.

On the other hand, the ECB is attentive to developments on the financial stability front. While good capitalisation reassures the banking sector in Europe, it nevertheless advances the necessary means to inject liquidity. It also intends that price and financial stability must be ensured, but achieved by different means and using various tools. One will not come at the expense of the other.

Faced with so many unknowns, the future of monetary policy remains open. It will largely depend on the development of economic indicators by 4 May, the day of the next monetary policy meeting. The ECB continues to point out that inflation remains far too high. Nevertheless, it needs to offer details on the size and timing of any future increase.

Eurozone inflation is very worrying

At a record high when we exclude energy and food, the inflation figures point to a widespread price increase that will be very difficult to stop.

The inflation figures for the eurozone in February confirm the trend of the previous month: while the primary rate continued its prolonged decline, at 8.5% (against 8.6% in January) but the rate excluding energy and non-transformed food continues to rise, reaching a new peak, at 7.4%.

Given the current trend, energy (whose price fell by 1.1% compared to the previous month and by 13.7% year-on-year) is giving up the place of the primary driver of European inflation to non-transformed food, whose prices rose by 3,4% compared to the previous month and 13.6% over one year. At the same time, service prices also follow an upward trend, taking 4.8% over one year.

These indicators make sense as euro area activity continues to rebound, with the PMI® S&P Global Composite for the euro area reaching 52 points in February, the highest level in eight months.

But they are not likely to reassure Christine Lagarde’s European Central Bank. As we know, it could not do much against the succession of political decisions in Moscow and Brussels that caused energy prices to soar, especially in Europe.

From that moment on, the main objective was to limit the contagion effect on the whole economy as much as possible to prevent inflation from taking hold. This is a failure. Inflation is everywhere and will be particularly difficult to uproot.

With the rise in food and the price of services, the purchasing power of Europeans will again be undermined in 2023, for which we point to inflation close to 6% on average. And since Europe’s energy supply will be even more complex and China will start up again, the hydrocarbon demand will be more critical; we think a rebound in energy prices is likely.

Faced with these figures, the task of the ECB looks highly complicated, and a stagnation of the eurozone economy seems likely.

We stay away from eurozone equities within our fund portfolios.

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