2023-12-15 19:38:53
The European Central Bank (ECB) now expects an inflation rate of less than 3 percent for the coming year: That was a central message from the central bank on Thursday. It has significantly lowered its inflation forecast, mainly because of energy prices. Like the American Federal Reserve, the Bank of England and the Swiss National Bank, the ECB is leaving its interest rates unchanged.
In the press conference after the interest rate decision, ECB President Christine Lagarde visibly tried to capture the euphoria of the financial markets about interest rates falling soon. The Governing Council of the ECB “didn’t even discuss interest rate cuts” – and there was a “whole plateau of holds” between increases and decreases, said Lagarde.
What was deleted from the ECB language was that inflation would remain “too high for too long”. Rather, the central bank now expects inflation to “gradually decline over the course of the year before approaching the Governing Council’s 2 percent target in 2025.”
Slight movement on the stock and bond markets
So what does all of this mean for investors? The German stock index Dax, which had reacted very positively to the news from America with concrete announcements of interest rate cuts and had risen above the 17,000 point mark, fell slightly following the ECB’s interest rate decision.
The market was hoping for “similar words of relief” from ECB President Christine Lagarde as previously from Fed boss Jerome Powell, said Christian Henke from broker IG: “But the ECB boss remained adamant and clearly rejected the calls for an interest rate cut .”
On the bond market, yields on ten-year American government bonds fell from 4.2 to 3.9 percent after the Fed’s decision. In Europe, federal bonds initially followed their American counterparts, but with the ECB decision they recovered to 2.12 percent.
Analyst comments the next day ranged from “a disappointment” to “a fairly mild decision” to “the ECB shouldn’t miss the jump”.
In any case, the ECB’s attempt to drive away speculation on interest rate cuts from the financial markets doesn’t seem to have really worked. The interest rate expectations reflected in the financial markets fell only very slightly. And Commerzbank even announced that it had revised its interest rate forecasts in favor of previous interest rate cuts: it now expects the first ECB interest rate cut in June 2024 instead of in December.
The ECB has also announced changes to its Corona crisis program PEPP. In the new year it will replace all expiring bonds until the end of June, but after that it will only replace some of them. Inventories are expected to fall by an average of 7.5 billion euros per month. At the end of the year she wants to stop buying again completely. This tends to be a more cautious approach than most people would have feared, said Frederik Ducrozet from Bank Pictet.
“Expectations priced into the markets are exaggerated”
Fed Chairman Powell’s statements were interpreted in a “dove-like” manner, i.e. as signals for a loose monetary policy, which ECB President Lagarde interpreted in a “hawkish” manner, i.e. more as a rejection of such a policy, said Ulrich Stephan, Deutsche Bank’s chief investment strategist for private and corporate customers. In the United States, six interest rate hikes of 25 basis points downwards would now be priced in by the market. The market is also currently expecting six interest rate cuts to 2.5 percent in Europe.
“I think the expectations of such a looser monetary policy are exaggerated,” said Stephan. Accordingly, there could be a risk of disappointment for the markets. This applies to both the bond and stock markets. “The markets have anticipated these significant interest rate cuts in the past few weeks and have caused price gains for both bonds and stocks,” said Stephan: “If there is a correction, investors should take advantage of the opportunity and enter the market.”
Even if the inflation rates are currently falling unexpectedly sharply and could “slip into negative territory” in the meantime, it doesn’t make sense as an investor to prepare for the risks of deflation and protect yourself against them, said Reinhard Pfingsten, the chief investment strategist at the Apotheker- und Ärztebank: ” Structural effects such as demographics, deglobalization and decarbonization are more likely to keep inflation slightly higher and real yields low.”
Christian Siedenbiedel Published/Updated: Recommendations: 12 Daniel Mohr and Archibald Preuschat Published/Updated: Recommendations: 6 A comment from Gerald Braunberger Published/Updated: , Recommendations: 10
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