The ECB cut rates

This follows the Bank of Canada, and before that, the Swedish central bank.

The reason they are cutting; inflation is moving back in the right direction, for many players.

The Eurozone as a whole is at 3%, on HICP measures (harmonised index of consumer prices), France quite a bit lower…

…and forward looking measures of expected inflation (the above is actual) are also well behaved, at ~2% for Germany. If your commitment is to price stability, you don’t want that number to a) swing wildly or b) go to low.

Unemployment also appears to be rising, especially in Canada, Sweden, and New Zealand. Those are large moves, and 8.5% for Sweden is not a great number.

And whilst that graph might look less immediately impressive, bear in mind the number we care about is short sharp movements, which we do by plotting changes in unemployment in excess of a rolling 12 month period minimum, and when it hits 0.50, we call it a recession (this metric is known as the Sahm rule, after Claudia Sahm, formerly of the Fed). Sweden is well past that point, as is Canada.

If inflation is moving lower, and unemployment higher, it does seem that policy is indeed restrictive, it’s hard to get that combination of events without it, and since policy works at a lag (it can take years to work its way through various wage reviews) actions taken today aren’t expected to impact the economy for at least another 12-18 months. So, if it is close to overshooting now, it is likely to keep moving in that direction due to intertia and lags.

And so, especially for Europe, where policy had arguably been far too tight for far too long (the pandemic is the exception), the last thing they want to return to is an underheated, stagnant economy. Hence, a very small tweak to the ECB cash rate, with little guidance about what to expect next, other than “we will be data dependant”.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Receive our investment insights

Something went wrong. Please check your entries and try again.