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The European Central Bank Lowers Its Rates

The ECB will continue to lower its key rates wherever possible. This will allow a slight improvement in the economic situation, but more is needed to solve the serious structural problems of the euro area.

By EC Invest

Unsurprisingly, the European Central Bank has made a further rate cut (the 4th of 2024) of 0.25% to set the interest rate on refinancing operations at 3.15% and the interest rate on the deposit facility at 3.0%.

Our monetary authorities are trying to keep the European economy afloat. It must also prepare for the turbulence that will inevitably result from Donald Trump’s return to the White House on January 20 and the increased competitiveness of the United States and Asia.

The ECB remains under pressure to pursue cheaper credit, which would breathe life into our stagnant economies. Therefore, further rate cuts are expected in 2025, and investors expect the benchmark rate to fall below 2.0% at the end of this bearish cycle.

However, miracles should not be expected. Christine Lagarde said the ECB will do its part of the job, but it is up to others to do theirs. While there is no doubt that the ECB will do what it can, it is not up to it to address the serious structural problems facing the European economy. It will not be able to boost European productivity nor move towards a truly single European market for financial products and services, and it certainly will not be able to remedy the significant policy mistakes made in recent years; Europe is lagging in wealth created and innovation and technology.

Therefore, while cheaper credit will undoubtedly give our economies a little boost, the outlook for the euro area remains perfect. We only invest in it through individual shares, which you can find on our website.

ECI EUROPEAN CENTRAL BANK Rate Cuts GRAPHIC 920x320

Switzerland cuts rates by 0.5%

With the euro at its lowest against the Swiss franc, the Swiss authorities are worried about the high cost of their currency and will do everything to weaken it.

In the face of lower rates in the euro area and the willingness of the monetary authorities in Frankfurt to remain on a downward path, the Swiss National Bank chose to take the lead, cutting its key interest rates sharply (-0.5%) to establish the main one at only 0.5%.

The SNB wishes to limit any possible compression of the interest rate differential separating Switzerland from the euro area. Despite offering much lower yields on Swiss government debt than on euro-area countries, investors continue to favour Swiss franc investments that they (rightly) perceive as a haven. As a result, the local currency continues to appreciate against the euro (gain of around 7% since the lows in May).

Currently traded around €1.07 for a Swiss franc (or 0.93 for €1), the Swiss currency was at its highest level at the end of 2023. At such levels, it is overvalued, which inevitably affects the competitiveness of the country’s products, both for export and in its domestic market.

The objective of the Swiss authorities is clear: to make the returns on Swiss debt investments even more meagre, making them less attractive and thus weakening the strong demand from investors, who would make the franc far too expensive for their taste. It will have lowered its key rates at each of the four monetary policy meetings held in 2024 and may well do so again at its next meetings, especially as inflation remains very low, at 0.7% in November.

Therefore, Switzerland’s return to 0.0% interest rates is within reach, and a return to negative rates cannot be ruled out. Beyond that, if traditional measures fail to weaken the franc, the SNB does not rule out direct intervention in foreign exchange markets as it has done in the past.

The uncertainty about the development of the franc and the low yields on this debt market are incentives to stay away from Swiss government bonds. We maintain exposure to the country through the equity market. It is low-volatility and incorporates many quality companies, integrating our diversified fund portfolios.

Canada does the same

The Bank of Canada is also continuing to ease its monetary policy at an accelerated pace, with a further 0.5% cut in key interest rates. This is the fifth decline since May, allowing the primary policy rate to rise from 5.0% in spring to 3.25% today.

Canadian monetary authorities are concerned about the slowdown in the economy, mainly due to low investment. They are also worried about the impact of a possible Donald Trump tariff on Canadian products. Therefore, they are taking advantage of the reintroduced inflation with their mandate (2.0% in October and even 1.7% for the underlying index, which excludes fresh food, energy, and mortgages) to make their monetary policy less restrictive.

Signs of recovery are already visible. This is the case for household consumption spending and the housing market, both retreating, benefiting from the reduced cost of credit already granted. However, the Bank of Canada expects relatively disappointing growth in 2025 and is committed to doing what it can to stimulate it. Given the country’s many assets, it could well do so.

We continue to invest in Canadian equities as part of our balanced and dynamic portfolios. However, the Bank of Canada expects relatively disappointing growth in 2025 and is committed to stimulating it. Given the country’s many assets, it could well do so.

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