ECB Rate Hikes Decision March 23

What does the ECB decision mean? That inflation reduction is the primary focus as persistently elevated inflation is a global challenge. Today ECB president Christine Lagarde announced a 50 bps rate hike which had a 100% probability until the Silicon Valley Bank Collapse and Credit Suisse troubles.

Fortunately for Credit Suisse, they were thrown a “life line” for now by Swiss Bank in the amount of $54B which helped remove some systemic risk. In the ECB, monetary policy works via the financial system. I believe this “allowed” ECB to proceed with the originally planned 50 bps rate hike without much resistance.

The EU inflation for Feb23 was 8.5% Y/Y vs 8.6% Jan23 with RISING CORE at 5.6% Y/Y vs 5.3% Jan23 & expectations. Inflation is highly elevated and showing no signs of coming down. Inflation is cumulative.

Inflation is monetary mismanagement. Too much money chasing a scarcity of goods and services. Mass increase in money supply and negative rates. Money growth led to inflation. Stagflation looks very likely as a potential outcome.

Are we in a bubble of everything? What does this mean for FED next week? I believe 25 bps is the minimum hike. I doubt we will see a pause. 3 ways to reduce inflation: 1. Raise Rates 2. Reduce Quantity of Money ie balance sheets & tighten credit 3. Reduce Gov Spending. And #3 isn’t happening. Now we just saw an increase in balance sheet of about 300B. So raising rates seems it until further notice.

With Silicon Valley not hedging its duration risk and having unrealized mark to market losses with “hold to maturity” negative real yield bonds, MBS, T-Bills, sovereign bonds and hoping for price to go up because they “believed” the FED and narrative that inflation was “transitory.” Will there be more banks? Contagion?! We don’t know but should remain aware and prepared. Proceed with caution.

Risk management is always #1.

Per Deutsche Bank, “once inflation is over 5%, it can take a decade for it to come back down.”

If the FED had raised rates earlier and reduced their purchases of MBS and bonds earlier, many of these occurrences could have been averted. The cause of all this is not due to recent restrictive policies but the extremely loose monetary policies beforehand with free money, negative rates, QE, mass expansionary policies and liquidity, etc which led to more money going towards riskier assets.

This will take time…but it will get better.