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Interest rates: EUR and CHF – March 2021

Already in March 2020, the ECB broke a taboo by allowing itself to buy more than 33% of a country’s debt for its massive asset purchase program. This removal of limits previously set in similar programs was considered by many commentators to be a risky measure for financing government deficits. Christine Lagarde had then indicated, in language designed to make a mark (probably inspired by Mario Draghi’s “believe me, it will be enough”), but at the same time not very responsible, that there was “no limit” to the ECB’s commitment to the euro, even if it was a temporary emergency purchase program in response to the pandemic. 
One year later, on Thursday, March 11, 2021, the ECB indicated through the voice of Christine Lagarde that the pace of debt purchases by the ECB will increase in order to calm the nervousness of the markets at the end of April / beginning of March. The ECB is thus aiming to prevent an unwanted contagion to the euro zone since the rise in 10-year bond rates in the United States in recent weeks. The pandemic emergency purchase programme (PEPP) will therefore be continued “at a significantly higher pace than during the first months of this yearr” so that economic actors can continue to finance themselves under good conditions. Even if the fears of a slippage of inflation are unfounded according to the ECB (whereas the inflation rate climbed to 0.9% in January and February in the euro zone), the current uncertainty does not encourage central banks to tighten their accommodating monetary policy.1850 billion to be committed by March 2022, and more than half of this sum has not yet been spent, it is understandable that the ECB intends to support weaker countries by allowing them to borrow at low cost. Despite pressure from Germany on this expansionary policy, the ECB is not prepared to let rates rise even modestly.

For the Swiss franc, the interest rate level has only risen slightly at the beginning of the year, and this has been limited to long maturities. The SNB justifies its expansionary policy, which has been in place since the fall of last year, by the desire to combat the economic consequences of the Corona measures, whereas before that the official objective was an appreciation of the franc. To this end, it has deployed a budget estimated at 120 billion Swiss francs in 2020 and expanded its balance sheet accordingly. Interest rates in Swiss francs remain in negative territory. 

The main risk for equities at the moment is by far a rise in interest rates. After this message from Frankfurt, investors can continue to have a quiet mind…for now.