As expected, the European Central Bank has raised its key interest rates by a quarter point this time to 3.75%. The decision is unsurprising, given that inflation is still well above ECB’s objectives.
On the other hand, by stating that their future decisions will lead to interest rate levels that will establish (and stabilise) inflation at levels consistent with its objectives, the ECB does remain on the upward path and has no intention of taking a break. This is an interest rate differential tightening that should support the euro.
European key interest rates will therefore continue to rise. This is all the more the case as Christine Lagarde and her colleagues perceive an inflation that has undoubtedly developed favourably in recent months, but with the flavour of declining energy prices and the disappearance of some bottlenecks that affected our supply chains. On the other hand, a real slowdown in demand due to more expensive credit is not expected. Therefore, monetary policy transmission to the real economy must still be clear to our monetary authorities.
Another critical decision is accelerating the reduction of the ECB’s balance sheet. As of July, amounts from maturing financial assets will no longer be invested, resulting in an average reduced balance sheet of €25 billion per month. This should lead to a gradual normalisation of the euro area interest rates.
Suppose it has yet to have a significant impact on our economies. However, rising interest rates will eventually impact demand and private investment, leading to a challenging year for our economies.
Inflation rebound leaves the ECB at a disadvantage
The rebound in inflation is terrible news for the ECB and makes its monetary policy meeting even more complex, the outcome of which was known on 4 May.
According to Eurostat’s quick estimate, inflation in the eurozone rebounded to 7.0% in April (from 6.9% in March).
Energy prices continued their decline, increasing by only 2.5% over one year, a rate of increase well below the general index. On the other hand, fees for services rose by 5.2% year-on-year (a record) and by 1.2% compared to the previous month. As for unprocessed foods, they decline but soar by 10.0% over one year.
These figures will not reassure the European Central Bank. Although determined to bring inflation back towards its 2.0% target, it is under intense pressure to tighten its monetary policy further. With inflation still at 7.6% in Germany and rising in France (6.9% in April against 6.7% in March), Italy (8.8% against 8.1%), Spain (3.9% against 3.1%) and the Netherlands (5.9% against 4.5%), the least we can say is that apart from the fall in energy prices – for which the European Central Bank is not responsible – it is difficult to discern how the increases in key interest rates already agreed have helped to control the rise in energy prices.
These figures reinforce the pressure on Christine Lagarde and her colleagues on the Monetary Policy Committee just days before their decision was announced on 4 May. Suppose they know full well that they must anchor inflation attacks and remain credible against their objective of 2,0%. In that case, they also understand that the policy rate hikes are their primary tool to achieve this risk of plunging our economies into recession. Investment
We expect zero growth over the current year and do not invest in eurozone equities as part of our diversified portfolios.
Price and interest rates
Investing in shares and bonds entails various risks of capital loss, such as price changes or the announcements of Central banks like the ECB. Other factors can also determine the value of shares and bonds. During May, Euroconsumers Invest brings back its Money Framework roadmap to help investors better understand how the market oscillates in the current times.