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Inflation: if the ECB raises rates in 2022, what happens on the markets?

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After the latest statements by the ECB leaders on inflation for the financial markets, a new phase is opening characterized by greater volatility.

ECB ready to raise interest rates

During yesterday’s press conference, ECB President Lagarde surprised everyone by stating that, unlike what has been said in recent weeks, now there is much concern about the level reached by inflation in the euro area (rising to 5% in December due to the jump in energy prices).

Contrary to the recent past, Lagarde no longer ruled out that i interest rates in Europe they will not be raised in the course of 2022. According to the number one of the ECB, more detailed considerations will be made at the meeting on 10 March, when the new economic estimates for the euro zone will be available.

Lagarde then clarified that interest rates will only be raised after the quantitative easing program ends.

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According to rumors circulating at the end of the press conference, purchases of government bonds within the qe plan should end in the third quarter and the first rate hike by the ECB could come by December.

A scenario shared by Antonio Cesarano, Intermonte strategist, according to whom “the most likely scenario could be to interrupt the qe in September, announcing it in March, and then check in June if the inflation estimates are positioned above 2% over the three-year period, so to have the fourth quarter available in order to possibly act on rates “.

More extreme is the vision of Goldman Sachs which expects two hikes in interest rates by the ECB of 25 basis points for 2022 both in September and December.

Markets, spread expected to rise with inflation

The first effects of the new course of the ECB have already been seen in yesterday’s session with the spread BTP / Bund which quickly rose to 150 points.

It is good to consider that the ECB over the past few years bought Italian government bonds for nearly 400 billion within the plan quantitative easing thus dampening any speculative flare-up on the spread.
If this support ends in the coming months, significant increases in the spread cannot be ruled out, which can have a negative impact on the cost of government debt but also on private individuals in the case of home loans.

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Good stocks, bad bonds and liquidity

Most analysts agree that in this scenario the equity markets are to be favored securities of the financial sector benefiting from higher interest rates and the companies operating in the world of luxury able to transfer the higher production costs to the final customer. See Warren Buffet’s strategy on this.

Penalized instead i stocks in the technology sector suffering in a phase of rate hike.

In a context of rate hikes from also avoid the bond market and liquidity whose value would be eroded by an increase in yields. See what financier Ray Dalio says about cash and bonds.

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