Diego Franzin, Head of Portfolio Strategies di Plenisfer Investments SGR
Yesterday, the European Central Bank announced a new 50 basis point increase in interest rates to 3%. President Lagarde stated that the increases will continue 'significantly and steadily', anticipating that there will be a new 50 basis point increase in March.
The ECB reiterated that its aim is to reduce inflation, which, although it fell to 8.5% in January from 9.2% in December, still appears too high and could be further fuelled by the new fiscal policies that European governments will implement to combat high energy prices.
Before ECB, US Central Bank increased rates of 25 basis point on Wednesday, bringing the cost of money to 4.5%, the highest level since September 2007.
Both central banks emphasised that they will continue to fight inflation with the goal of bringing it back to 2% and that rates are unlikely to start falling this year.
Despite these announcements, the markets reacted positively, bucking the trend of the past. What has changed?
The central bank presidents reiterated that monetary policy decisions will be "guided by the data" on the economy and inflation: compared to last December, inflation and economy are showing the first signs of a slight slowdown. The market therefore interpreted the central bankers' statements as a change in rhetoric and reacted with short-term optimism: the market seems to be confident on monetary tightening could slow down or the “pivot” could be reached as early as the second half of the year, if these trends will continue in 2023.
In our view, this reversal is unlikely to occur in 2023.
Inflation moves in waves and we believe that all secular inflationary factors remain: rising geopolitical conflicts, demographics, low productivity, structural scarcity of raw materials and energy, etc. In this context, the reopening of China is certainly an additional inflationary element. But above all, real interest rates, when measured against actual inflation, are still negative.
At Plenisfer, we therefore believe it is premature to lower our guard in the fight against inflation: to beat it, it would be necessary to achieve positive real rates, a goal that would require a far greater dose of monetary tightening administered for longer than hitherto.
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