- On 14 December the Fed raised rates by half a point, and on the 15th the ECB did the same.
- The ECB announced it would start to shrink its balance sheet in March 2023; both warned that rises would continue.
- To plan for 2023, the prudent course was to assume that financing would remain dear, without depending on rate cuts that had not been announced.
On 14 December 2022 the Federal Reserve raised interest rates by half a point, and on the 15th the ECB did the same and announced it would begin to shrink its balance sheet in March 2023. Both warned that rises would continue. After several rises of 0.75 points, the pace was moderating, but not the direction: central banks were still tightening policy. Taken together, 2022 was closing with interest rates far above those at the start of the year.
For anyone following central bank decisions, the end of the year offered a pause in intensity, not in objective. For companies and families, the message was that an environment of higher rates than in the previous decade would persist in 2023, and that any forecast of income, expenses or investment had to include it from the outset. Closing the year with that idea clear makes planning the next one easier.
A gentler pace
After several rises of 0.75 points, both the Fed and the ECB moved to half a point. It is a gentler pace, but not a pause: both warned that rises would continue, and the ECB also announced that it would begin to shrink its balance sheet in March 2023.
The moderation of the pace can be read as a sign that central banks consider they have made progress, but also as a way to calibrate better the effects of what has already been done. Monetary policy decisions act with a lag, so what has been decided so far has not yet shown its full effect. That caution explains why the pace slows but the direction holds. Shrinking the balance sheet withdraws liquidity from the system gradually, and its effects are less visible than those of rates, but it contributes to the same objective.
The destination is still the same
The pace was slowing, but the destination was still high rates for some time. Slowing the pace of rises is not the same as cutting rates, and the message from both central banks was that the fight against inflation was not over.
It is easy to confuse a slowdown in rises with a change of trend. But a car that slows down is still moving in the same direction. Anyone who takes financial decisions on the basis that rates will fall soon is taking a risk that central banks themselves do not endorse. The prudent course is to expect high rates and, if they later fall, to count it as good news. Central banks do not control the future: their decisions depend on the data, and that data can surprise in either direction.
Planning 2023 with dear financing
To plan for 2023, the prudent course was to assume that financing would remain dear. It is worth drawing up budgets and investment plans with high financing costs as the base scenario, avoiding dependence on rate cuts that had not been announced, and keeping a safety margin in cash.
That means reviewing the calendar of debt maturities, assessing which projects remain viable at the current cost and which decisions can be postponed at no cost. It is also worth renewing or renegotiating in advance any financing lines that fall due in the first half, because the ability to choose terms is greater when there is no urgency. An adviser can help put this plan in order. Keeping a cash cushion, reviewing credit lines that fall due and not committing to investments that depend on cheap financing are simple steps.
When you plan prudently, a favourable surprise is just that.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
