The ECB is expected to raise interest rates by at least another 75 basis points in the near future, namely 50 basis points in December and 25 basis points in February. In addition, he will reduce his balance sheet to control excess liquidity. As a result, the short-term lending rate will rise by another 50 basis points from the lower limit of the interest rate corridor, determined by the deposit rate at 1.5%, to the key refinancing rate at 2%, and ultimately remain at 2.75% , probably at the end of June 2023 – and perhaps this level is approximate and is meant to be neutral. So, we expect the ECB at the end of 2023 and 2024. keep interest rates unchanged.

At the equity level, most of the investors we’ve spoken to over the past two months seem to be poised for a major downturn in Europe this winter. The bad news about an unfavorable winter has already been factored into the market. Fundamental data show that European stock markets have had more ups than downs from current levels for more than three months.

Turning now to bonds, German 10-year bonds do not yet reflect our expectations of a quick post-crisis recovery and inflation that will stabilize slightly above 2% in the long term (2% is also the ECB’s official target). ). Therefore, we estimate that the 10-year German bond yield will rise to 2.7% by the end of 2023 or early 2024, after it remains close to the current level and while the economy is in recession. As for the euro, it should be noted that the Fed’s interest rate cut from the third quarter of next year is likely to close their gap with their eurozone counterparts. In addition, the recovery of investors’ willingness to take risky positions, while they take into account the looming recession in the Eurozone, will also limit capital inflows into the US currency. Taking into account the above, we believe that by the end of 2023, the euro will recover and form against the dollar at $1.10, and next year it will reach $1.20. Finally, after 2024, there could be a long-term return to purchasing power parity set at $1.30.

* Mr. Holger Schmieding is an economist at Berenberg Bank.