No movement on EUR interest rates before end of 2021?

 Some economists say EUR interest rates are not about to go up. This means that the stock markets could remain well oriented and bullish. They believe that Europe will be more of a “follower of economic growth” than a leader. The ECB would continue to buy back assets (i.e. QE) of up to EUR 20 billion per month. We see the ECB more reactive than proactive, more follower than ambitious and constant more than surprising. Therefore, the ECB would not change its key rates before the end of December 2021.

Going lower still does not seem to be the hypothesis adopted. In fact, from a certain level, excessively negative rates become unproductive. Aren't they already? Others say that we are not yet at this level, known as the "reversal rate". We have read that -0.85% would be possible if the ECB still wanted to act or stopped buying assets overwhelmingly. A further cut by 0,35% would be the maximum potential movement down. The ECB seems to have become aware of the possible impacts and collateral damages of its policy. The other idea would be to review during the ECB's "strategic review" the level targeted for inflation. But we know that changing our strategy when we fail to reach it amounts to an admission of weakness and failure. We do not think that the ECB President will change the inflation rate imposed for so long (i.e. around 2% on average and if possible, below). This assumption is more realistic since the United States will surely not move its rates before the end of 2021. Here inflation seems well contained in their target range. Therefore analysts believe that the equity markets will remain well oriented and 3 to 7% (depending on the area and geographic zoke) is not impossible in 2020. We do not want to talk about a speculative bubble and Iran-USA tensions or the trade war between China and the USA are only anecdotes which are quickly forgotten by the still relatively euphoric markets. We can therefore think that the treasurers will not have an increase in their financing costs in 2020 and that if they are in a "long" position, they will unfortunately still have to reap losses and the destruction of the principal. The miracle recipe is still not invented, I'm afraid. Treasurers too often subject to the famous IAS 7 (i.e. "cash and cash equivalent") will have no other solution than to use short products such as "Money Market Funds". I don’t think corporate debt in the form of Commercial Paper can help if it doesn’t have a zero floor. Decidedly, cash management will remain complicated for treasurers, hedge funds and other asset managers. Cash and liquidity positions are sometimes the means to maintain a transitional position before reinvestment in another asset or the purchase of another target. The problem is that the so-called "neutral" or "transitional" position when it costs the holder ends up hurting. Now, when you are "long", you must immediately or at least as soon as possible, replace your funds to avoid destruction of value, even when you are trying to create it. It remains the ultimate goal of any investment manager or treasurer. This is one of the biggest difficulties of any manager. It will not change in the next 24 months; we must fear it. So, let's stay positive and hang in there hoping that the economy gives us a ray of sunshine in Europe. The fundamental indicators ultimately stay pretty good, isn’t it?

Fran?ois Masquelier – SimplyTREASURY Luxembourg