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On 2 February 2023, the European Central Bank (ECB) raised its key interest rates by 50 bps (0.50%) and confirmed that a similar hike was on the cards for its next meeting on 16 March 2023. Christine Lagarde announced that the ECB will then evaluate the subsequent path of its monetary policy ahead of the meeting scheduled for 4 May 2023. Bond markets tumbled immediately after the announcement, pushing down risk-free rates and especially the German 10-year Bund. However, the decline came undone within days.
The ECB’s announcement had initially been perceived as signalling a pivot point in the central bank’s monetary policy stance, with perhaps only a smaller 25 bps increase on 4 May 2023. However, that perception proved short lived.
As things stand, ECB monetary policy easing remains a distant scenario. Although eurozone headline inflation has started to slow due to lower energy prices, core inflation remains high (5.2% in December 2022). Inflation has not yet been tamed, meaning the ECB could maintain a tight policy stance throughout 2023 and erode the initial post-meeting optimism.
This optimism could also prompt disappointment in the United States, where the labour market remains tight (non-farm payrolls rose by 517,000 in January versus an expected 185,000). Fed Chair Jerome Powell has clearly indicated that tackling inflation effectively requires an easing in labour market tightness. So far, any pivot in monetary policy is being prevented by the data upon which the central banks depend when making their decisions.
The opinion expressed above is dated February 10, 2022 and is subject to change.
See also: https://latribune.lazardfreresgestion.fr/en/us-pension-funds-back-in-surplus/
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