Central banks around the world have been tightening their monetary policies aggressively over the past year with the objective of controlling inflation, and economists expect interest rates to rise even further until the end of 2023. In particular, in 2023 the Fed’s key benchmark borrowing rate is projected to hit a 17-year high of 5-5.25% from its current 4.25-4.50% level. 

When looking at Europe, the European Central Bank slowed its record pace of interest rate increases slightly but promised that more hikes are on the way, joining the U.S. Federal Reserve and other central banks in reinforcing an inflation crackdown despite some recent headway against the high prices that are plaguing consumers.

It is evident that the ECB is far from done with interest rates increases. European Central Bank President Christine Lagarde said inflation is too high and reiterated the central bank's determination to bring it back to 2 per cent in a timely manner, meanwhile the central bank had already increased interest rates by 250 basis points. The ECB is now planning to increase interest rates by 50bps at its next meeting in February, and another 50bps rate hike is expected in March. Therefore, as long as core inflation remains high and its forecasts remain above 2%, the ECB will continue with its interest rate hike, and the ECB policymakers are expected to let go only once inflation is fully dealt with and doesn’t represent an issue anymore.

This situation has an important effect on private credit, that has been one of the fastest growing asset classes over the past five years due to the declining interest rate environment we had before. As a result, private credit funds have captured a big share from the traditional bank channels. With rising interest rates, the scenario is changing completely when it comes to borrowing, and the hike in interest rates is already tightening access to private credit.  

Clearly, there is an opportunity to gain on the current news about inflation and interest rate hikes as banks are the beneficiaries of higher rates. We propose to do so in a form of a protected participation on SX7E rather than individual stocks, to create a buffer and a layer of protection.

Dow Jones Euro STOXX Banks is the euro zone banking index. Main components are Societe Generale, BNP Paribas, Credit Agricole and Deutsche bank all of which have been in the green zone for the last month similarly to the other banks represented in SX7E. 

We have picked a structure that benefits from the upward trend of SX7E which is believed to be continuing in the upcoming months. Additional feature that makes this product more attractive, is that you will benefit from a 100% capital guaranteed back at maturity irrespective of the performance of SX7E.