The investment chief of Amundi, Europe’s largest asset manager, said there is a chance the European Central Bank (ECB) could double its deposit rate to 4 per cent this year as it continues its efforts to fight inflation, concluding that financial markets have “over-reacted” in recent days to signs of easing of consumer price growth.
Vincent Mortier, Amundi’s chief investment officer (CIO), told The Irish Times his company’s base case is that the ECB will increase its deposit rate, which has jumped from minus 0.5 per cent to 2 per cent over the past six months, to 3 per cent this year. This is broadly in line with what financial markets are currently predicting.
“However, I wouldn’t be surprised if we ended up at 3.5 per cent or 4 per cent by the end of the year,” he said.
The ECB’s main lending rate – which is the benchmark for about 300,000 tracker mortgages in the Republic – is currently half a point percentage point higher than the deposit rate.
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Euro zone inflation fell more than expected to an annual rate of 9.2 per cent last month from 10.1 per cent in November, according to figures released by Eurostat, the EU statistics agency, on Friday.
Economists polled by Reuters had expected the figure for December to come to 9.7 per cent. Data from Germany and France earlier in the week had also pointed to easing inflation.
Minister for Finance Michael McGrath told RTÉ Radio’s New at One on Friday that he believed Irish inflation has peaked, as the Eurostat figures showed it declined to a rate of 8.2 per cent last month from 9 per cent in November.
European shares, measured by the Stoxx 600 index, have rallied by 3.7 per cent in the first few days of trading of 2023 amid hopes that inflation is falling back. However, Mr Mortier said that markets have “probably overreacted a little bit”.
Mr Mortier said that it will take some time for inflation to fall back to the ECB’s 2 per cent target and that it will likely still be running at an annual rate of 3-4 per cent in two years’ time.
“If inflation falls quickly, we do not think it is good news per say, because it would mean that economic activity is collapsing,” he said. “So, if we have a big drop in the next few months in inflation, it might be a sign that we are entering a severe recession.”
