- The ECB kept rates unchanged, but changed the message: risks to inflation are tilted upward.
- Markets reacted with higher bond yields, a stronger euro and falling equities.
- For variable-rate mortgages and business financing, it is worth reviewing scenarios with higher rates.
On 3 February 2022 the Governing Council of the European Central Bank (ECB) left all its monetary policy instruments unchanged, with a statement almost identical to December’s. What changed was the tone of the press conference given by its president, Christine Lagarde, who acknowledged that risks to inflation have tilted upward and that the January figure, 5.1% in the euro area according to the flash estimate, came in above expectations.
Lagarde also admitted that the December projections, inflation of 3.2% for 2022 and 1.8% for 2023 and 2024, are skewed to the upside, especially in the short term, so they could be revised in March. And she no longer ruled out raising rates this year, a different message from December, when a rise in 2022 was considered very unlikely. For companies and families with debt or savings, it is a sign that the era of zero rates may be nearing its end.
What was decided and what changed
Official rates were left unchanged: the refinancing rate at 0% and the deposit rate at -0.50%. The ECB reminded markets that it will not change them until net asset purchases have ended, and that a rise requires inflation to settle durably at 2% over the medium term. What is new is that the president acknowledged these conditions could be met sooner than expected.
The reason is the behaviour of prices. Throughout 2021 the ECB maintained that the surge was largely temporary, linked to energy and supply-chain bottlenecks. But the January figure surprised to the upside once again, and every surprise of this kind erodes the thesis of passing inflation. The debate moves from whether there will be rises to when and at what pace.
The market reaction
Markets read the message as a sign of tightening. The euro strengthened and at one point traded around $1.14, the yield on the ten-year German bond rose by about ten basis points and European equities fell during the session. It is the usual reaction when investors bring forward the moment at which central banks begin to withdraw stimulus.
These moves should be interpreted with caution: a single meeting does not define a trend, and one day’s prices can be reversed the next. What matters is the change in expectations. Long-term interest rates and Euribor are references that companies, families and financial institutions use to set the cost of their loans, and they begin to price in that change before the first decision is taken.
What to review
Anyone with a variable-rate mortgage or a credit line linked to Euribor would do well to calculate how much their payment would rise if rates went up by one or two points, and to discuss fixed or mixed-rate options with their bank. For companies with short-term financing, it is a good moment to review maturities, hedging and the capacity to absorb a higher financing cost.
Savers, for their part, should understand that higher rates may improve the return on deposits but also tend to come with volatility in fixed-income and equity assets. Every situation depends on time horizon and risk tolerance; this note is for information only and the prudent course is to consult your adviser before making decisions.
A change of tone is not a rate rise, but it sets the direction that those planning for the medium term need to take into account.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
