Interest rates will continue to rise in Eurozone in 2023
by Michalis Psilos
The Christmas message from central banks in US and EU shook many investors: interest rates on both sides of the Atlantic will continue to rise in 2023.
Markets had been holding out hope for a pause in the rate hike or even a rate cut. But both Fed chief Jerome Powell and ECB President Christine Lagarde made clear they are still a long way from hitting their inflation target 2%.
In the United States, the upper limit for the key rate should be above 5% at the end of 2023 - in the euro area there could be a 3 in front of the decimal point, in a few months.
The ECB Governing Council was even clearer: Based on current economic data, rate hikes of half a percentage point are expected at the next meetings as well.
ECB economists are confident that inflation will remain at 2.3% even in 2025 - and therefore above the ECB's 2% target. Therefore, Lagarde's announcement of a fourth consecutive rate hike since July was clear. The steps have taken so far are not enough, the ECB chief said: "And we have to accept that we must continue the fight against inflation."
Inflation in the eurozone eased slightly in November to 10.1% from 10.6% in October. However, it is still five times higher than the 2% target set by the euro watchdog.
Commerzbank chief economist Jorg Kramer predicts the ECB will raise key interest rates by 0.50 percentage points at the first two meetings in 2023, in February and March - followed by a further step of 0.25 percentage points. The interest rate on deposits will then be 3.25%.
Tight monetary policy
Jerome Powell also made it clear after the Fed's rate decision: "Our focus now is to make our monetary policy tight enough to ensure that inflation returns to the 2% target over time." Inflation eased in America to an annual low of 7.1% in November. However, it is still miles away from the Fed's target.
From Powell & Co's point of view, the important thing is to keep interest rates relatively high before lowering them becomes an option. In 2023, investors should prepare for a persistently restrictive path—that is, a tight monetary policy line that will slow the economy.
（Editor:Liao Yifan）
