The hawk continues to fly high, to use monetary policy jargon. The president of the European Central Bank (ECB), Christine Lagarde, has reaffirmed the concept of “higher for longer” interest rates.
In a statement at an event organized on Friday by the Financial Times, the Frenchwoman ruled out that the price of money will fall soon and made it clear that in the next two quarters there will be no rate cuts: it is the hard policy of the hawks, in front of the most conciliatory of pigeons.
“Maintaining them long enough will help lower inflation,” he said. “We are at a level where we believe that, if it is maintained for long enough – and this long enough is not trivial – it will take us to the 2% objective in the medium term,” she pointed out. Earlier in the week, Bundesbank President Joachim Nagel said it was too early to talk about cutting rates, as inflation is a “very greedy beast” that is difficult to defeat.
But time passes and pressure is growing for the ECB to make a gesture of monetary easing, now that the eurozone is flirting with recession and registering anemic economic growth (GDP contracted 0.1% in the third quarter).
Especially since inflation in the eurozone is slowly approaching acceptable levels. From the highs of 10% that were touched after the war in Ukraine and the energy crisis, in October in the eurozone the CPI fell to 2.9% compared to the 4.3% registered in September. It is the lowest level since July 2021 and we must not forget that the ECB's target is 2%. Furthermore, for the first time since the inflationary surge and the change in the cycle, the level of interest rates in the eurozone (4%-4.5%) is already higher than the CPI.
But the president of the ECB is distrustful. In particular, she fears that energy costs could rise due to tensions in the Middle East. “We have to really monitor the price of energy in the future,” Lagarde warned. “We should not assume that this respectable headline figure of 2.9% is something that should be taken for granted for too long.” For this reason, Lagarde ruled that the reduction in interest rates will not occur “in the next two quarters,” and she added that this “is enough.”
“Even if central banks were of the view that rates could be lowered next year, it would be unrealistic to expect them to say so now, as it would confuse and undermine their message that rates should stay higher for longer.” , analyst Craig Erlam of Oanda commented in a note.
The reality is that, despite the uncertainty and restrictive monetary policy, the major stock markets are still accumulating gains so far this year. It seems that the expectations of long-term investors are not as harsh as those of central bankers and that they are confident that rate cuts will not be long in coming. Thus, the Eurostoxx50 gains almost 9% annually and the German Dax more than 8%. In the United States, the SP500, 15%, and the Nasdaq Composite, a spectacular 32%.
“I'm surprised at how well the markets are doing,” a Barcelona manager confided this week. “With two wars, in Ukraine and the Middle East, and the geopolitical crisis, not only are the stock markets holding up, but the real economy appears resilient, with unemployment still close to historic lows in both the eurozone and the rest of the world.” USA".
“Whatever your view of the future monetary policy of the Federal Reserve or the ECB, what we can say with certainty today (the word is too strong, we agree) is that interest rate hikes are over, as that inflation has begun to fall and economic growth has begun to slow. A pause will therefore prevail,” write Mirabaud analysts.
In his opinion, the cuts could be brought forward in the event of an increase in unemployment, a collapse in consumption or geopolitical crises. Don't falcons rest?
