With the fall in long-term rates and the announcement and end of the increase in key rates, optimism is starting to return to the markets, explains Christian de Boissieu, who sees this as a positive move for the real economy, i.e. investment, growth and employment.
It was enough for central banks to confirm the end of their key rate hikes for optimism to rise in the ranks, while the geopolitical and economic context remains fragile. Of course, inflation is gradually receding, but it remains at the mercy of a new energy or food shock that is difficult to predict. Europe as a whole is likely to escape a recession, but Germany is right in the middle of it. Unemployment is rising in France, probably for a few quarters.
The ECB has just published a growth forecast for the eurozone of only 0.6% for 2023 and 0.8% in 2024. Certainly nothing to brag about: the post-Covid catch-up effect has run out. We are going back to the fundamentals, i.e. the notoriously low potential growth in Europe. The full employment and growth of 2023 in the United States (2.6%) make us aware once again of the structural weaknesses of the European continent.
Two Approaches
The difference in the sensitivity of central banks on both sides of the Atlantic also plays a role. There are gaps in communication that reflect different approaches.
The ECB speaks of a “plateau” for its key rates, without specifying how long it will last. Everyone has their own prognosis: first drop in March or summer 2024? The ECB’s caution is justified by its mandate: price stability is its “main” objective. Given the uncertainty of geopolitics and its consequences for inflation, the European Central Bank is abandoning the forward-looking guidance of the markets, which has been so frequent for the past fifteen years, in order to reserve total freedom to assess the economic situation.
The Fed, according to its bylaws, has a broader mandate. Of course, it must be concerned about price stability, but also about growth, employment and the level of long-term rates. It continues to provide forward-looking guidance to the markets, as it has just announced “three or four” cuts in its key rates for 2024. The paradox is therefore that the Fed is more firmly and precisely committed than the ECB to the beginning of the decline in short-term rates, while the US economy is at full employment and inflationary pressures are consequently more prevalent. Difference in mandates, difference in responsiveness. The ECB had been too slow to raise rates in the face of soaring inflation. Out of an abundance of caution, it should not take too long to lower them in the face of the disinflation that is beginning…
Given that a return to 2% inflation per year, the target of advanced market central banks, will take time, some have suggested a 3% target. There is no magic number here. However, it would be inappropriate to move in this direction when the fight against inflation is well underway.
Central banks control very short-term rates through their key rates. Since they have essentially ended their massive bond purchases, they have only an indirect influence on long-term interest rates. These long-term rates have recently fallen sharply with the anticipation of a decline in short-term rates. Public and private borrowers will benefit a little. This is a positive move for the real economy, i.e. investment, growth and employment.
