Yields and the euro: why they become the ECB's compass
New rate cuts expected but Euroland's financial conditions are deeply marked by market turbulence
3' min read
3' min read
The objective does not change. Price stability, and thus inflation expectations, is at the heart of the European Central Bank's activity. The Trump administration's desire to change the structure of the economic system revolving around the United States, although unclear in its objectives and its very rationality, is complicating the picture. For the April meeting, the practically unanimous expectation of analysts is that of a new cut: the rate on deposits should therefore fall to 2.25%, from 2.50%, while the refinancing rate would go down to 2.40%.
Inflation still falling
This is a rather low level, if one considers that the real neutral rate is likely to be between zero and 0.50 per cent: taking into account the inflation target of 2 per cent, the ECB's monetary policy might therefore not be any more restrictive. The inflation situation actually allows for sufficient optimism. Even services prices, which had been stuck at 4% for months, have started to slow down, and so has the trend in quarterly and half-yearly annualised inflation in the same sector.
Loans at an all-time high
Economic activity seems (seemed) to be gaining momentum, in the face of falling credit costs: loans to non-financial businesses rose in February (latest available, not seasonally adjusted) to an all-time high, surpassing the previous record of October 2022: a possible sign of the end of a very cold phase in business activity (but inflation must be taken into account: the figures are nominal). Under normal circumstances there would be reason to smile a little.
The Knot of Duties
The problem is the uncertainty generated by the duties. Their extent, between announcements and suspensions, is unclear; nor is that of the EU's countermeasures. Their very function is unclear: are they a negotiating tool? How much will remain structural, the 10% (which is still a high level)? The question is immediately relevant for monetary policy: do tariffs change potential growth and, consequently, the neutral rate (the level of which is not easy to identify).
Turbulence on yields
In the immediate term, all this turns into market turbulence, which is immediately relevant for monetary policy. The financial conditions in the euro area - to be distinguished from the financing conditions often referred to by the ECB - first of all saw sharp changes in yields. The short end of the curve, which expresses and implements the stance of monetary policy, fell sharply, while longer-term rates rose rapidly.
