Investors reading the tea leaves after December meetings of the world's leading central banks interpreted the results as a good reason to get back into the stock market. Several economists have declared it is still too early to sound the all-clear.
«It's not so bad» is how one might sum up the mood when looking at stock markets in recent weeks. Since mid-December, Switzerland's leading barometer, the SMI, gained around 5 percent, Germany's DAX well over 8 percent, and the Dow Jones more than 4 percent. So far, the market optimism has not been dampened by the first rather subdued annual company results.
The relief is based on expectations there will be no energy shortages in Europe and that inflation has reached its zenith. This will give the central banks more leeway to take ease their foot on the gas pedal when raising interest rates or switching back to lowering rates more quickly than previously thought.
Inflation Fight Continues
But these hopes were recently dashed by several economists. The European Central Bank's chief economist, Philip Lane, warned that interest rates in the euro area still have higher to go in the fight against inflation. Last year the ECB was able to say the need to raise interest rates to more normal levels was clear. But now they need to enter into a «restrictive range,» he said in an interview with the «Financial Times» (behind paywall).
Exactly where the peak of rate hikes will remain unclear and Lane currently believes them to be in neutral territory. «Yet we are still not where the risks become more two-sided or symmetric. So, we need to raise rates more,» he said, referring to the current complex mix of rising prices for imports and commodities, higher export prices, and wages.
The balancing act between too much and too little will be a long-term task. «This is not just an issue about the next meeting or the next couple of meetings, it’s going to be an issue for the next year or two.» Nor will the days of sustained low inflation like in the days before Corona pandemic return.
Below 4 Percent is Difficult
Philipp Hildebrand (pictured below) expresses a similar view. While the former SNB president and current vice chairman of Blackrock expects inflation to fall quickly from its current levels, it will be difficult to get it below 4 percent.
«Many of us will be surprised how quickly inflation will fall, » Hildebrand told «Bloomberg» (behind paywall). Although he expects inflation to fall rapidly from nine to four percent, «getting it below four or three (percent) will be the difficult part,» he said.
(Image: Keystone)
Furthermore, the market is wrong and «far too optimistic» to believe central banks will do any kind of easing. «I don't see any chances of easing this year,» Hildebrand said.
Central banks will continue their tightening path as they seek to limit the risk of a resurgence in inflation and are anxious not to lose their long-term anchor for inflation expectations.
Premature Declaration of Victory
Harvard professor and former International Monetary Fund chief economist Kenneth Rogoff also poured water on the notion, warning of the consequences of a significant economic downturn in the US and Europe. «I expect a deep recession in Europe,» Rogoff said in an interview with Germany's «Handelsblatt» (behind paywall, in German) on the sidelines of the World Economic Forum in Davos. Any forecasts to the contrary would be assuming a premature cessation of the Russia-Ukraine conflict as a base scenario and disregard the continuing high uncertainties.
The US Federal Reserve stated that it would accept a recession in the fight against inflation, and to prevent a later resurgence of high prices. But it is unclear whether the situation will develop that way, and the robust labor market might prompt the Fed to raise interest rates further.
The next meeting of the Fed's Open Market Committee begins January 31, and the ECB's next interest rate meeting is February 2. The SNB's regular monetary policy assessment will not take place until March 23.
