US Federal Reserve Chairman Jerome Powell and ECB President Christine Lagarde have recently made it crystal clear: they are still a long way from reaching their goal. The inflation rate will be above the target of two percent for several years. The ECB economists have also revised their interest rate expectations.
The Christmas message from the central banks sounds shrill for many investors: interest rates on both sides of the Atlantic must continue to rise in 2023. Investors had secretly hoped for a pause or even cuts because of lower inflation. They were disappointed and had to give up hope of a Christmas rally. US Federal Reserve Chairman Jerome Powell and ECB President Christine Lagarde made it crystal clear that they are still a long way from reaching their goal: the specter of inflation will probably linger for some time and the inflation rate will exceed the central banks' target of two percent for years to come.
The signs continue to point to tightening - risk of recession or not. Then it applies from Powell's point of view
In the USA, the upper limit for the key interest rate should be more than five percent at the end of 2023 - in the euro area there could be a three in front of the decimal point in just a few months. The ECB Governing Council firmly believes that interest rates "must continue to rise significantly and at a steady pace". ECB boss Lagarde was even clearer: Based on the current economic data, interest rate increases of half a percentage point are to be expected for the next interest rate meetings.
In the USA, the key interest rate is now in a range of 4.25 to 4.50 percent after the most recent interest rate increase of 0.50 percentage points. In the euro zone, the monetary watchdogs also increased the deposit rate, which banks receive from the central bank for parking excess funds, by half a percentage point to 2.0 percent. In 2023, investors must be prepared for a persistently restrictive course - i.e. a monetary policy line that slows down an economy.
Powell made it clear after the interest rate decision: "Our focus now is on making our monetary policy tight enough to ensure inflation returns to our 2% target over time, rather than on rate cuts. " The message was clearly interpreted in the financial markets. "The Fed seems to think it needs to keep interest rates high through 2023," said chief strategist John Vail of asset manager Nikko Asset Management.
Jochen Stanzl, chief market analyst at CMC Markets, takes a similar view: "The peak in interest rates is within reach, but the hike back down to the bottom should take a good year." The stock market has to get used to a restrictive Fed - even if inflation rates continue to fall. Recently, there had been increased indications that price pressure was easing.
The inflation rate fell to an annual low of 7.1 percent in November. However, it is still miles away from the Fed's target. "A refusal of interest rate cuts in the coming year does not have to be set in stone in the long term," says LBBW economist Elmar Völker. "Persistent signs of weakness in the US economy and more reliable indications of declining inflation should ultimately lead to a rethink over the course of the next year."
This is unlikely to start at the ECB for the time being. The ECB economists are even now of the opinion that the inflation rate will still be 2.3 percent even in 2025 - and thus above the ECB target of two percent. Lagarde's announcement of the fourth consecutive rate hike since July was therefore unequivocal. The ECB must raise its key interest rate further to a sufficiently restrictive level.
The steps taken so far are not enough, said the head of the ECB: "And we must accept the fight and continue the battle against inflation." The inflation rate in the euro zone fell slightly in November to 10.1 percent from 10.6 percent in October. However, it is still five times higher than the two percent target set by the euro watchdog.
Commerzbank chief economist Jörg Krämer assumes that the ECB will raise key interest rates by a further 0.50 percentage points at its first two interest rate meetings in 2023 in February and March - followed by a further step of 0.25 percentage points. The deposit rate would then be 3.25 percent. For Bank of America economists, the ECB's message is clear.
"This central bank takes it very, very seriously to ensure that inflation returns to target levels in a timely manner," the US bank's economists write. They expect the ECB to even raise the deposit rate to 3.50 percent by June 2023. It has been a very long time since the deposit rate reached such a level - the last time was in 2001.
