Macro Update For Monday 12/9/2022: The ECB’s Monetary Policy after the Hiking of Interest Rates for 75 bpSep 12, 2022

The ‘’persistent’’ inflation is the main reason for the ECB’s second consecutive and bigger interest rate hike, as Cristine Langard confessed, during the press conference of the meeting. This aggressive policy attempts to limit demand and the risk of feedback of inflationary expectations in the market since that kind of inflation occurred 50 years ago. Also, made it clear, that the progress of the European Economy is left to the governments as a whole. ECB’s only obligation is to ensure price stability and to return inflation to the target of 2%, in the medium-long run.  Besides, the main driver that affects the increasing inflation is the reduced supply and not the excessed demand that everybody talks about, but the common belief is that the European economy is leading closer to a recession. ECB’s President denied that argument having said that during 2023 EU won’t have a recession but a diminished development of 0,3%.

The same thought about reduced supply though, but on the other side of the Atlantic, was depicted by the famous economist Mohamed El-Erian, who was supporting a year ago, that generally, the economic monetary policy in the US has to be changed, since the rules after the Lehman Brothers crisis in 2008, were ‘‘written’’ to boost demand and to avoid unemployment. Now however we have a lack of supply, after the Pandemic crisis in 2020. So, if we see the correlation of the monetary policy of FED and ECB between each other, even with a bit of delay, is highly positive.

So, it was too obvious that the ECB would follow the hike in interest rates as the FED did. Of course, all know about the consequences in the global markets, after an increase in interest rates. The cost of borrowing is getting higher, the cost of capital is getting higher, therefore the returns from the bonds are getting lower, and inevitably the risk of the stocks that demand borrowing is getting higher, resulting in lower returns or even losses for the majority of them, concerning their profits. Eventually, these chains are ending when the overall market collapses, in order for the economy to find its balance again since the economic balance is always the fight between supply and demand.

The markets seemed that they rallied after the announcement of the increase of the ECB’s interest rate and the DAX, the S&P500, and the DOW30 closed the week higher with 0.29%, 3.65%, and 2.43% respectively. We consider this as an event bear market rally because all the fears of the upcoming recession are being discounted constantly by the investors. That explains why the global markets are falling and the main trend is downward since January 2020. An upcoming article will be written to discuss the opinion of why the markets haven’t seen their troughs yet and what indications are driving them to that path.

The Economic Calendar of the week (12/9 – 16/9) has the U.S Consumer Inflation Expectations, the German CPI for August, the German ZEW Economic Sentiment for September, the EU ZEW Economic Sentiment for September, the U.S NFIB Optimism for August, the U.S CPI for August, the Eurozone Industrial production for July,  the U.S PPI for August, the U.S Crude oil Inventories (weekly estimated), the E.U Trade Balance for July, and the U.S Continuing Jobless Claims(weekly estimated).


by Stavros Chanidis

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