What's going on?
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.
What does this mean?
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.
Why should I care?
The bigger picture: Central bank done good.
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.
For markets: Climate change.
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”…