Central banks remain unimpressed by financial market turmoil

Last week the European Central Bank (ECB) made the 50-basis point rate hike we had expected. The key interest rate now stands at 3.5% and it is quite likely - and in line with our expectations - that another step will be taken. Although it will probably be smaller. The ECB finds itself in a difficult area of tension. The economic environment is stable, but inflation, currently at 8.5%, is far above the target value of 2%. Even within the forecast horizon until the end of 2025, according to the expectations of the central bank, the inflation target will not be reached. This points to higher interest rates. However, the events surrounding the Silicon Valley Bank have given rise to renewed concerns about financial market stability. Memories of 2008 have not yet faded, and many people are probably still aware that interest rates were raised back then when the bubble was already about to burst. But what was that about "hindsight is always the wiser..."? 

The lesson of the ECB, however, should be to proceed a little more cautiously. In principle, President Lagarde has already expressed her will to raise interest rates further. However, the ECB will be even more sensitive to data. The decision of the US Federal Reserve will also be exciting. Likely, it too will raise the key interest rate further. The range should then be 4.75-5.0%. But President Powell will have to listen to many questions concerning the banking sector. Presumably, like President Lagarde, he will make clear the central bank's willingness to provide liquidity.  

Whether this will calm the currently rather nervous financial markets remains to be seen. The risk is that current events will be the black swan that many have feared. And in this case, it would even be a swan that was already encountered in a similar form in 2008. At that time, it was not a pleasant encounter and so we decided to reduce the risks in our portfolios. Accordingly, equities are currently underweighted, the interest rate risk (duration) is low in the euro area as well as in the United States. We are therefore waiting until the fog has lifted. 

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