Another turn in interest rates: the ECB has cut its three key interest rates by 0.25 percentage points each. But Philipp Dobbert, chief economist at Quirin Privatbank and at quirion, doesn't expect any further rate moves for the time being. What it means for investing.
As expected, the ECB cut interest rates in June. At the same time, however, it revised its inflation forecasts slightly upward. A contradiction?
Even after the latest cut, key interest rates are still quite high: the rate for main refinancing operations, the one most often cited in the media, now stands at 4.25 percent, and the rate for deposits at the ECB at 3.75 percent. Honestly, right now I wouldn't want to be in a central banker's shoes, having to make decisions like these. Economic development in the euro area did improve somewhat in the first quarter. But it remains weak. And that's partly down to the high level of key interest rates. Even though inflation rose a little in April and May, it's had a two in front of the decimal point again for some time now. The ECB's decision is understandable. But I think it's only now that things get really interesting.
Why is that? After all, the goal of bringing inflation back to a level of two percent does seem, all in all, within reach…
If you have inflation rates of, at times, over ten percent in mind, then it does seem that way. But it isn't that simple. As we know, the trigger of the inflation dynamic was above all price jumps in energy. If it had only been about those, you could simply have waited until energy became cheaper again. The central bank has no direct influence over energy prices through its interest rate decisions. High key interest rates dampen overall demand. The point is to break a wave of price rises that gradually takes hold of the entire economy. The aim is to secure general confidence in medium- to long-term price stability. Whether that aim has been achieved, or whether second-round effects such as high wage demands now stoke inflation again, isn't yet clear.
Now that the ECB has shifted into reverse: does this set the course for rates to fall rapidly further?
I think this will probably remain the only rate cut this year. I consider it very likely that the ECB will first observe for a while how inflation and the economy develop. Hardly anyone is now counting on swift, sharp rate cuts. That would require the economy to keep getting weaker while the inflation rate moves very clearly downward at the same time. With this rate move, the ECB has committed neither to a particular pace nor to a particular direction. Were the economy to pick up more strongly and inflation to rise more sharply again, rising key interest rates wouldn't be ruled out either.
For a long time, it had been expected that the already higher key interest rates in the US would fall first. What does the now even larger interest rate gap mean for the markets?
In the US, the economy is stronger than in Europe. And inflation is stubbornly holding at a higher level. That's why nothing there currently points to rate cuts. In theory, a widening interest rate gap means that capital would have to be pulled out of Europe and flow into the US. That would weigh on European capital markets. In the real world, the question is whether the interest rate gap isn't already priced in. Besides: interest rates are important for the markets. But beyond that, there are a thousand and one possible reasons why prices move in one direction or the other.
What about bonds specifically? The prices of US bonds had already risen sharply back in the winter of last year on hopes of imminent rate cuts, only to slump again afterward…
The development once again impressively demonstrates the pointlessness of forecasts for an investment strategy. At the end of last year, many were sure that key interest rates and bond yields could only go down. Many advised stepping up bond purchases in order to profit from the expected price increases. As we know today, that came to nothing at first.
But US bonds are also found in quirion's bond portfolio…
Just not because we're speculating on a particular price development. We blend in bonds according to the investor's risk profile, in order to dampen the generally higher price swings of the equity components. To that end, our bond portfolio is broadly positioned on a lasting basis. It fulfils its stabilising function, both over the long term and right now.
And what happens to your interest rate offers?
For money that should remain available at short notice, we continue to offer two ways to benefit from the still fairly high level of interest rates: our interest account and Cash-Invest. But the ECB's decision is a reminder that the level of interest rates isn't set in stone. Over the long term and on average, the stock markets simply offer better return opportunities. With a portfolio that's diversified as broadly as possible, you make use of those without taking on unnecessary risks.
