An interest rate decision by the US central bank not so long ago could rock financial markets. An unexpected interest rate hike could sometimes drive share prices down by one or a few per cent. Indeed, in the 1990s and at the beginning of this century, central bankers did not care about the investment world and focused on their core mission: making sure inflation is at or just below 2 per cent, possibly combined with promoting employment. Nowadays, it is almost a day's work for them to announce their plans as clearly as possible and far in advance, to avoid unrest in stock markets.
Boring. Or is it?
From this perspective, the European Central Bank (ECB) meeting next week looks set to be a dull affair. Especially also because at the previous meeting in September, the bank pushed forward many important decisions to the December meeting. That said, quite a lot has changed since the September meeting. As a result of rising natural gas prices, inflation in the eurozone has risen to 3.4 per cent year-on-year. That is the highest level in 13 years. This is increasing pressure on the ECB to work towards a policy change. For instance, the bank could announce that it will start buying fewer (government) bonds and other assets. Whether it really gets that far depends largely on whether the German economy stays on track.
Unexpected growth slowdown
Last week, a collaboration of Germany's main economic agencies lowered its growth forecast for the current year from 3.7 to 2.4 per cent. The institutes are worried about shortages of chips and other components and delays in supply chains, including due to container shortages. As a result, the publication of the Ifo index next Monday is eagerly awaited. This index already fell from 101.8 in June to 98.8 last month. If this decline continues, it is an indication that German entrepreneurs see the future less brightly. Given that Germany is still the engine of the European economy, if the Ifo index is weak despite rising inflation, the ECB cannot afford to anticipate a policy shift already.
Glide of the euro
In a Deutsche Bank survey, 46 per cent of respondents said they expect the ECB to intervene too late. This percentage is slightly lower for the US central bank (42 per cent) and even quite a bit lower for the Bank of England (20 per cent). Economists do not expect the ECB to raise interest rates until late 2023. By then, the Federal Reserve may have already completed several interest rate moves. Across the Channel, UK interest rates look set to go up even in the first half of next year. Europe is lagging behind on interest rates and this is reflected in the euro exchange rate. It has lost 5% against the dollar and 7% against the pound this year. As things stand, there will be no change in the euro's slide for the time being.
Joost Derks is currency specialist at iBanFirst. He has over 20 years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.
