European bourses are pointing to a weaker start after gains in the previous session as investors digest the latest central bank action.
· ECB speeds up the process of devising a new tool to address fragmentation
· Fed hikes rates by 75bp as expected, its largest rate hike in almost 30 years
· BoE is expected to raise rates by 25bp, marking a fifth straight meeting of hikes
ECB
Stocks across Europe managed to snap a 6-day losing run yesterday, turning higher after an unscheduled ECB meeting lifted market sentiment. The central bank met less than a week after the monetary policy meeting to speed up work on a new tool to address regional fragmentation risk and calm the bond route. The bank’s commitment to containing yield spreads lifted sentiment helping stocks end higher.
Federal Reserve
The Federal Reserve, as expected, hiked interest rates by 75 basis points, marking the largest rate hike in almost 30 years. The federal fund rate now sits between 1.5% and 1.75%, which is still low by historical standards. The Fed indicated that it could raise rates by a further 50 or 75 basis points in the July meeting and expects rates to rise to 3.4% by the end of the year, which would be the highest level since January 2008.
Moving faster and harder to raise interest rates has an economic impact. The Fed projections show that growth is expected to slow markedly in the coming months while unemployment is likely to rise.
Following the Fed’s decision and Fed Chair Powell’s press conference, stocks rallied, suggesting investors were relieved that the US central bank would act aggressively to tame 4-decade high inflation. However, as the dust settles following the meeting and the reality of higher rates and a recession hit home, stocks are falling, and the USD rises.
BoE
Today the pound is falling ahead of the BoE rate decision. The UK central bank is expected to raise rates by 25 basis points, which would mark the fifth consecutive meeting of hikes and take the benchmark lending rate to 1.25%, a 13-year high. All nine policymakers are expected to vote to lift the key lending rate, with three potentially voting for a 50-basis point hike, consistent with the last meeting. More votes for an outsized hike could boost the pound. Further hikes are also expected in August and September.
The decision comes amid growing concerns over the health of the UK economy, with inflation over 9% and expected to push higher into double digits. With energy and food prices still rising and the pound trading down 10% against the USD, the inflation outlook is still bleak. Meanwhile, the UK economy contracted in March and April and may lose further momentum in the coming months as the cost-of-living crisis continues to hit households. Should policy makers focus on the deteriorating economic outlook, the pound could come under pressure and back towards 1.20.
The decision will be accompanied by the meeting minutes, but the BoE Governor Andrew Bailey is not scheduled to deliver a press conference.
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