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• Industrial production in Germany declined 3.4% in March 2023, worse than expected.
• The automotive sector was the biggest drag, with the manufacture of motor vehicles and parts sinking 6.5%.
• Other decreases were seen for the manufacture of machinery and equipment (-3.4%), construction (-4.6%), and production of capital goods (-4.4%), intermediate (-3.5%), and consumer goods (-0.1%).
• Energy output rose 0.8%, while excluding energy and construction, industrial output fell 3.3%.
• Q1 2023 production was 2.5% higher compared with the previous quarter.

Lower industrial production is inflationary and may affect the European Central Bank’s policy on interest rate hikes, which was supportive of the euro. During the European trading session, the rate against the dollar increased by approximately 0.3% due to Friday’s core buyers around the Quarter’s developing VWAP, while the decade’s VWAP serves as resistance and forms the upper extreme of the current balanced price range on the daily interval. The highs may be targeted for absorption purposes, while the selling tail may indicate more dollar-long positions, depending on investors’ perception and the US policy path.

Higher interest rates can have a negative impact on demand and increase the cost of borrowing, which can in turn affect production and lead to inflationary pressures. Moreover, with the current concerns over US banking, European banks could also be affected, potentially putting the European Central Bank (ECB) in a difficult position of balancing the need to curb inflation while supporting economic growth.

In the US, elevated interest rates could further exacerbate these issues, potentially leading to liquidity problems and the risk of bank runs, which could result in lower deposits and a further tightening of credit conditions. To address this challenge, a policy of elevated interest rates combined with support for higher production may be an effective solution for combating inflation. Ultimately, a carefully calibrated approach that includes a combination of interest rate adjustments and targeted support for the banking sector may be necessary to effectively manage these challenges. One potential solution is to implement higher interest rates combined with supported higher production, which may help to efficiently combat inflation.

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