The ECB preview Mar 2023: price stability remains a fairy tail
The ECB Preview
Price stability remains a fairy tail. Increased odds for ECB to hike +1% by May 2023
Upcoming Event - Thursday, March 16, 2023 - European Central Bank (ECB) Interest Rate Decision
Governing Council of the European Central Bank (ECB): Monetary Policy Meeting in Frankfurt Germany
European Central Bank (ECB) monetary policy revolves around price stability The Harmonised Index of Consumer Prices (HICP) is the ECB’s most important index to measure price stability (inflation).
- Since 1997, consumer prices across 19 EU countries have increased +71.19%
- The ECB’s governing council believes that price stability is best maintained by aiming for 2% inflation over the medium term
- HICP inflation in the euro area decreased to 8.6% in January 2023 from 9.2% recorded in December 2022
If price stability in the eyes of the ECB is 2% and current inflation is at 8.6%, it's safe to say that the ECB is not even close to achieving its aim for price stability.
On average, Euro area consumer prices have increased 2.84% per year since 1997
1.12% is the average ECB Key Rate over a 22 year period
Source: Eurostat / Skilling
Euro Stoxx 50 Index has returned 3.94% annualized during the previous 5 years
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Will the ECB hold at 4% after the May meeting?
People who have borrowed cheaply in euros may not be able to handle higher interest rates
- Investors may be skeptical that a key rate above 4% could trigger an increased risk in loan defaults and reduced consumer spending.
- Lower EU consumer spending is forecasted for those who have borrowed euros at super-low rates during the previous rate cycle.
- Higher interest rates to reduce borrowers' spending.
There is no easy way out for the ECB and if rates do in fact push beyond 4%, the recession risk for Europe most likely will increase. With bank deposit rates below inflation, owning stocks could be an attractive alternative against high inflation for those investors with long term views and no need for short term liquidity.
The ECB needs to see more evidence
Although it's still too soon to judge if the ECB’s recent higher rate hiking cycle is affecting EU economic growth, unemployment, and real estate markets. As the months move forward and more data is seen, only then can the ECB make any decision to slow, pause or even change the rate direction.
In the meantime, and if history is any judge, equity markets over a long period of time have historically remained ahead of inflation.
What traders are expecting during the next ECB policy meeting and beyond
The ECB has announced that they will hike 0.5% for the March 16th, 2023 meeting, lifting the key interest rate from 3% to 3.5%. The fact that the recent February HICP data was higher than what most analysts expected may have increased the chances for the ECB to follow up with another 0.5% hike for the May 2023 meeting as well.
If this is the case, the ECB key rate could be at 4% by the end of May 2023.
- Most likely outcome: ECB hikes +0.5%, ECB President Mrs. Christine Lagarde indicates another hike in May 2023, and Mrs. offers no further clues regarding potential hikes after May.
- Alternative outcome: ECB hikes +0.5% and does not indicate that there will be another hike in May, in this case, this may suggest that the ECB will start to slow down the rate hiking cycle.
Product Spotlight
Despite the economic uncertainty, the Euro and European stock markets have been resilient over the last 52 weeks of trading.
European Indices
| Index Name | Symbol | YTD % | 1 Month % | 3 Month % | 52 Week % |
|---|---|---|---|---|---|
| Euro Stoxx 50 | EUSTX | 8.80% | -3.24% | 3.23% | 15.52% |
| CAC 40 | FRA40 | 8.62% | -2.39 | 4.16 | 10.68% |
| DAX | DE40 | 7.59% | -2.54 | 3.31 | 10.44 |
| IBEX 35 | SPA35 | 2.02 | 1.65 | 2.02 | 2.02 |
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Euro Forex
| EUR FX | YTD % | 1 Month % | 3 Month % | 52 Week % |
|---|---|---|---|---|
| Euro/Norwegian Krone | 8.42% | 5.14% | 9.46% | 17.31% |
| Euro/South African Rand | 6.54% | 1.39% | 5.85% | 18.42% |
| Euro/Swedish Krona | 2.30% | 2.73% | 5.30% | 9.01% |
| Euro/Australian Dollar | 2.22% | 4.29% | 3.51% | 7.71% |
| Euro/Canadian Dollar | 1.36% | 2.79% | 2.05% | 5.79% |
| Euro/Japanese Yen | 1.03% | -0.15% | -1.65% | 10.78% |
| Euro/British Pound | -0.23% | -0.08% | 2.67% | 6.23% |
| Euro/U.S. Dollar | -0.36 | -0.57% | 0.30% | -2.23% |
| Euro/Swiss Franc | -1.55 | -1.12% | -1.26% | -4.35% |
Not investment advice. Past performance does not guarantee or predict future performance.
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