Stockholm Syndrome
- 06 March 2023 (5 min read)
- The February inflation data vindicates the ECB hawks. We remain however concerned with the “financial channel”: the January batch for loans confirms the credit impulse in deeply negative.
- We look at Sweden and the UK as “canaries in the coalmine” when it comes to monetary policy transmission.
In the Euro area, the inflation figures for February vindicate the Governing Council’s decision to signal its intention to deliver another 50-bps hike on 16 March. The slowdown in economic activity is not yet having the expected moderating impact on price behaviour. We continue to think the monetary tightening has however started to work its way through the economy, even if it has not yet visibly impacted aggregate demand. The data for January has confirmed the steep decline in the credit impulse. The historical relationship with GDP with a lag of a quarter is relatively tight, even if base effects from the pandemic may have blurred the picture and ample liquidity buffers may delay the transmission to business and consumers decisions.
Cracks usually appear first in the most interest-rate sensitive sectors of the economy. The recent developments in Sweden are interesting from this point of view. Transmission should be swift there, given the dominance of variable rate mortgages and an extremely stretched housing market before the tightening began. GDP contracted significantly in Q4 there (-0.9%) amid sharp declines in house prices. The Riksbank is in a quandary. If it stops hiking rates, it risks fuelling the depreciation of the currency and hence imported inflation. Accepting a quite deep recession – and the collateral risks to financial stability – may be the only workable avenue there. The UK could be the “next shoe to drop”. The recent dataflow is not as bad as in Sweden, but the housing market correction has started.
The ECB Governing Council is visibly tempted by additional tough moves beyond March, but we feel that the risk of a “double dip” scenario is also gaining ground. Transmission may be slower than in the UK or in Sweden because of structural features of the Euro area economy – with the dominance of conservative lending practices and fixed rate mortgages in many member states – but it does not necessarily mean that down the road the impact is smaller.
Disclaimer
This website is published by AXA Investment Managers Asia Limited (“AXA IM HK”), an entity licensed by the Securities and Futures Commission of Hong Kong (“SFC”), for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy, sell or enter into any transactions in respect of any investments, products or services, and should not be considered as solicitation or investment, legal, tax or any other advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities under any applicable law or regulation. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation, investment knowledge or particular needs of any particular person and may be subject to change at any time without notice. Offering may be made only on the basis of the information disclosed in the relevant offering documents. Please consult independent financial or other professional advisers if you are unsure about any information contained herein.
Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee such opinions, estimates and forecasts made will come to pass. Actual results of operations and achievements may differ materially. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Information herein may be obtained from sources believed to be reliable. AXA IM HK has reasonable belief that such information is accurate, complete and up-to-date. To the maximum extent permitted by law, AXA IM HK, its affiliates, directors, officers or employees take no responsibility for the data provided by third party, including the accuracy of such data. This material does not contain sufficient information to support an investment decision. References to companies (if any) are for illustrative purposes only and should not be viewed as investment recommendations or solicitations.
All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and that past performance is no guarantee of future returns, investors may not get back the amount originally invested. Investors should not make any investment decision based on this material alone.
Some of the services listed on this Website may not be available for offer to retail investors.
This Website has not been reviewed by the SFC. © 2023 AXA Investment Managers. All rights reserved.