Inflation, Growth: understanding the delicate equation of the European Central Bank.

ECB Outlook: Towards a Dovish Turn 🕊️ Christine Lagarde, President of the European Central Bank (ECB), recently stated that "the dark days of winter appear to be behind us"

ECB Outlook: Towards a dovish turn 🕊️

Christine Lagarde , president of the European Central Bank (ECB) , recently stated that "the dark days of winter appear to be behind us," announcing a possible monetary easing in the coming months.

The ECB's borrowing rate is currently set at 3% , but many officials are advocating for a gradual reduction to support fragile economic growth . Lagarde, however, insists on the need to maintain some flexibility to avoid jeopardizing the recovery in the event of a new shock.

The direction seems clear: a gradual decrease in the deposit rate is envisaged, in a context of slowing inflation and sluggish economic activity .

The problem of inflation in the Eurozone 🔍

Inflation, which peaked at 10.6% at the end of 2022 , is now declining sharply. The main causes of this surge were:

• A post-COVID demand shock

• Logistical disruptions

• The energy crisis linked to the invasion of Ukraine

Particular attention is being paid to the services component , which has traditionally been stable but has recently come under pressure. Projections anticipate inflation of 3% in 2025 , approaching the ECB's target of 2%.

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Growth in Europe: a still fragile recovery 🧱

The PMI, a barometer of the economic situation 🩺

The Purchasing Managers' Index (PMI) is a key indicator of economic performance:

• SMI > 50 : economic expansion

• PMI < 50 : contraction

The composite PMI rose to 49.5 in December , signaling a slight improvement , but still below the critical threshold . The manufacturing sector , in particular, remains in contraction.

The ECB must therefore avoid stifling growth by maintaining excessively high interest rates, while retaining some monetary policy flexibility .

Our Evvest analysis 🔍

A dollar strengthened by contrast 💵

Expectations of falling interest rates in Europe contrast with a more dynamic US economy, which should support the dollar against the euro.

A more accommodative ECB could, however, support European equity markets , which are currently relatively cheap compared to their American counterparts.

But several questions remain:

• Will weak European growth be enough to support the markets?

• Will political divisions in Europe dampen investor enthusiasm?

Our current position 🧭

• Change from underweight to neutral on European equities

• Maintaining a positive view on the US dollar

We believe European stocks could rebound, but remain selective and cautious in the face of a still uncertain economic environment.

Conclusion: Navigate with flexibility and clarity ⚖️

The ECB is preparing to ease its monetary policy, while maintaining its capacity to respond to economic shocks. Inflation is declining, but growth remains fragile and European political divisions are hindering the potential for recovery.

At Evvest , we advocate an agile and balanced approach , adjusting portfolios according to macroeconomic signals, while maintaining a diversified international exposure .