Whatâs Going On Here?The European Central Bankâs (ECBâs) decision not to cut eurozone interest rates last week mightâve 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 hasnât 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 â a slowdown from January. Thatâs below the ECBâs 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 â including its inflation target. Why Should I Care?The bigger picture: Central bank done good.
When inflationâs high, companies sell products at higher prices, which feeds through to higher earnings and increased economic output. It makes sense, then, that the ECB didnât lower rates further last week: the central bank doesnât have a great track record of spurring inflation, but it has been effective at reducing commercial banksâ interest income, thereby crimping their profits. Instead, itâs those very banks the ECBâs measures were aimed at, in order to help them better support the regionâs coronavirus-bruised businesses.
For markets: Climate change.
Low inflation typically makes bonds more attractive to investors, since the fixed amount they pay doesnât lose value as quickly as when inflationâs 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 whoâd built "all-weather portfolios" that should perform well no matter what. Emphasis on âshouldâ... | 