almost 4 years ago • 2 mins
The European Central Bank’s (ECB’s) decision not to cut eurozone interest rates last week might’ve been proved right: data on Friday showed that the rate at which prices of goods and services rose in its major economies last month still hasn’t picked up 🇪🇺
Inflation was 1.7% in Germany, 1.4% in France, and 0.7% in Spain versus the same time last year – a slowdown from January. That’s below the ECB’s previous target of 2% for the eurozone as a whole, even though record low interest rates should help pump cash from banks into the economy and encourage spending (which would in turn boost the prices of desirable products) 🎈 But that target might soon fall in any case: after several years of low rates and low inflation, the ECB decided in January to begin its first review of its policies since 2003 – including its inflation target.
When inflation’s high, companies sell products at higher prices, which feeds through to higher earnings and increased economic output. It makes sense, then, that the ECB didn’t lower rates further last week: the central bank doesn’t have a great track record of spurring inflation, but it has been effective at reducing commercial banks’ interest income, thereby crimping their profits 😬 Instead, it’s those very banks the ECB’s measures were aimed at, in order to help them better support the region’s coronavirus-bruised businesses.
Low inflation typically makes bonds more attractive to investors, since the fixed amount they pay doesn’t lose value as quickly as when inflation’s high. Investors selling stocks normally opt to buy into the relative safety of bonds too, which usually causes their prices to move inversely. That counterbalancing effect is key to a balanced portfolio. But last week, stock and bond prices fell at the same time, worrying investors who’d built “all weather portfolios” that should perform well no matter what ☔️ Emphasis on “should”...
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.