For Alessandro Tentori of AXA IM, inflation continues to move in the right direction on both sides of the Atlantic. In Switzerland, the SNB can be reactive in the event of strong variations in the franc.
This month of June is particularly rich in monetary policy announcements from central banks. What conclusions can we draw from the announcements made by the European Central Bank (ECB) and the American Federal Reserve (Fed) a few days before the presentation of its examination of the economic and monetary situation this Thursday? An update with Alessandro Tentori, Chief Investment Officer (CIO) for Southern Europe at AXA Investment Managers during a recent visit to Switzerland.
The evolution of inflation was closely scrutinized during the first half of June with the announcements of monetary policy decisions made by the ECB, which lowered its rates by a quarter of a point on June 6, and the Fed which left its key rate unchanged last Thursday. Is the decline in inflation on the right track or will we have to wait even longer?
Overall, developments are going in the right direction. In the United States, the CPI inflation index, published Thursday, stood at 3.3% over one year in May, compared to 3.4% in April. If we consider other recent statistics, inflation has rebounded slightly in Germany: the rise in consumer prices reached 2.4% year-on-year in May across the Rhine, or 0.2 points more than ‘in April. In both cases, we are of course not yet at the 2% level which is targeted by the central banks but the trend is, overall, still in the direction of a reduction. For the United States, we expect inflation to be 3.4% in 2024, then 2.5% in 2025. This should allow the Fed to make two rate cuts in 2024, in September and then in December. , then four rate cuts in 2025.
“This should allow the Fed to make two rate cuts in 2024, in September then in December, then four rate cuts in 2025.”
Concerning inflation, the direction is the right one but things are taking a little longer than some market participants hoped at the start of the year. When the upward price trend took hold in 2021, central bank experts debated for a long time whether this was “permanent” or “transitory” inflation. Today, we could say that both camps were right in their own way: it was a temporary inflation… but it lasted longer than expected. The important thing is that things stabilize and confidence returns.
So there is no risk that inflation will rebound?
We can never rule out the possibility of a rebound, even if only temporary. This could be the case, on the one hand, if the price increase becomes anchored in habits: namely that many people and companies get used to the fact that prices increase, that employees regularly ask for increases of wages, that providers increase their prices accordingly. On the other hand, there may be exogenous factors, linked to developments on the geopolitical level which could increase the prices of oil, certain raw materials or foodstuffs, for example. Faced with such exogenous factors, central banks, or even governments, cannot do much.
What are your expectations in terms of monetary policy and regarding the evolution of rates on the ECB side?
“An advantage of the SNB is that it holds large foreign currency reserves, around 20% of the total. This allows it to react more precisely, for example in the event of strong variations in the franc. The Bank of Japan, which only holds yen, does not have this advantage.”
We expect four rate cuts, two this year in September and December, and then probably in March and June 2025.
There is often talk of a “neutral” or natural interest rate which helps keep inflation at a stable level. At what level is it located in Europe?
It is difficult to answer this question. In the EU, this range is relatively wide – it extends from -0.5% to +1% according to ECB estimates. This calculation takes into account in particular the potential growth of the economy as well as the estimate of inflation in the medium term. In Switzerland, the natural interest rate is estimated at around 1%.
In Switzerland, the SNB will communicate its monetary policy decision this Thursday. What are your expectations?
At AXA IM, we have not made a specific prognosis regarding the SNB’s decision. What we can say is that inflation in Switzerland should continue to slow down, in particular thanks to the strength of the franc which limits pressure on import prices. The increase in energy costs in 2022 and 2023 has also not had the same impact in Switzerland as in other countries in Europe, such as Germany for example. Finally, the labor market is regulated differently in Switzerland, in a decentralized manner and by branch of activity. There is no negotiation of a generalized salary increase as is the case in certain other European countries, or even in certain sectors in the United States. Additionally, an advantage of the SNB is that it holds large foreign currency reserves, around 20% of the total. This allows it to react more precisely, for example in the event of strong variations in the franc. Comparatively, the Bank of Japan, which only holds yen, does not have this advantage.
