Despite a struggling economy, with sluggish demand and struggling industry, the Central Bank has raised its key interest rates by 0.25%, setting the primary interest rate at 4.0% and signalling that it will not stop there. It will raise key interest rates for as long as it takes to bring inflation down to 2.0% and keep them at high levels for as long as it takes after that.
Its forecasts show that inflation will remain above targets for a long time: For 2023, inflation in the euro area will still exceed 5% and will remain around 3% in 2024; even in 2025, it should still be slightly above the ECB target of 2.3%.
One factor concerning the ECB is the sharp rise in costs per unit produced. As the rise in wages does not correspond to output, productivity is under pressure, as is the competitiveness of the European economy.
As the European economy and labour market are relatively inflexible, inflation is unlikely to ease soon. We, therefore, believe that the euro area will have to face a long period of expensive credit, which will undoubtedly weigh on our economies, which are doomed to disappointing growth.
Fed muddies the waters
While the key interest rate has been left unchanged, the Fed is now seeing it rise again towards the end of the year. This was not expected and did not please investors.
As expected, the U.S. Federal Reserve left its rates unchanged at its last monetary policy meeting. On the other hand, it surprised investors with its projections for the future of its monetary policy.
In the December 2022 and March 2023 projections, the members of the Monetary Policy Council predicted a peak for US policy rates at just over 5.0% - their current level since the policy rate is set at between 5.0% and 5.25%. But the projections announced at this meeting point to a peak at a higher level, around 5.5%. This marks the possibility of two future rate increases, each one-quarter of a point.
The contrast between policy rates remained the same this month, and the hits on two additional rate hikes ahead do not reassure investors. They were betting that, at the current level, the cost of credit was at a peak. They, therefore, welcomed the fact that the American economy has, on the whole, held up reasonably well to the shock of such a rapid and significant monetary tightening and questioned especially the timing of a downturn.
With its new projections, the Fed is changing the facts: it does not think it has finished with the monetary tightening. The markets are adapting to this news: US interest rates are rising, with the 10-year mark returning to more than 3.8%, while the primary US interest rates are...
We do not invest in eurozone equities as part of our diversified portfolios and reserve our sole presence on these equity markets to a few individual equities. As for the US, its assets remain firm in our diversified portfolio.
