ECB raises interest rates

The 50 bps hike announced by the ECB today comes as no surprise given that the ECB's mandate in this regard is clear and inflation so far still remains far from the 2% target. In this regard, we should not forget that the ECB's main mandate is to monitor inflation and the data recently published in Spain, Germany and France are not good, with core inflation continuing to soar due to the rising cost of the shopping basket and other basic goods and services for households.

Although the financial turbulence in the US and recently in Europe with Credit Suisse seemed to make this possibility less likely, at EthiFinance Ratings we stress that this year's inflation forecasts are still far from the inflation target, so the ECB's attitude is the most coherent given that the current situation of the financial system is better than before the 2008 crisis - institutions are better capitalized, non-performing loans are under control and, although until now profitability has been the main problem, with the rise in rates we expect an improvement in the organic capacity to generate capital, facilitating their capacity to absorb latent losses in their investment portfolio at maturity as a result of the rise in rates.

However, we believe that the tone of the hike will soften in future meetings in view of the behavior of the monetary aggregate M3 -the one used by the ECB as a leading indicator of inflation- as it maintains the sustained downward trend -which anticipates a correction of inflation in the medium term- to the point that its annual evolution would already be at levels below those presented in 2009 when the ECB made the first rate cut, the latter action still far away given the monetary stock and the situation of inflation already mentioned.