June 28, 2022

Euro Stays Grounded as ECB Gives Signal

On Thursday, benchmark European bonds recorded a high of 8 years, but the stocks and euro remained grounded after the announcement of the European Central Bank (ECB). The central bank announced that interest rates for the euro zone would go up from the next month, making it the first time in almost a decade. The Japanese yen also saw itself decline to 20-year lows. For months, markets have been trying to predict how quickly the ECB would start hiking up interest rates as part of the monetary tightening policy that has been seen globally in more than two decades.

The moment was marked by bond market dealers, as the German government bond yields reached their highest level to 1.41% in the last eight years. These 10 year bonds highlight the cost of European borrowing. While stocks eventually began to decline once more, the euro mostly remained grounded. Inflation in the euro zone has also reached record high figures of 8.1% and is rising more. Therefore, it was expected that the ECB would have to make some moves to out an end to it. This involved putting an end to its bond buying program from next month, which it did announce.

However, the details of the plan the ECB outlined were the most relevant. The central bank said that next month would see the interest rate go up by a quarter point and September would see an increase of about half a point. This would make the 50 basis points increase to be the first recorded in the last 22 years. Market experts said that the rise in interest rates in both July and September have already been priced in, as the ECB had joined the hiking ‘party’ a bit later than some of the other global central banks.

But, they also added that they don’t think the ECB will get as aggressive as the US Federal Reserve, for as long as the Russia-Ukraine conflict continues because it is weighing down market sentiment. Some new forecasts were also published by the ECB, which saw the bank make adjustments to its inflation projections. Previously, it had predicted inflation to reach 5.1% this year, but this has now been adjusted to 6.8%. Likewise, the 3.7% growth outlook predicted previously has now been adjusted to 2.8% because of the high food and energy prices. The news conference post-meeting resulted in broad-based yet small losses in stocks in Europe, with miners in the lead.

China has also again imposed lockdown measures in Shanghai and this also took a toll on European stocks. However, banking stocks fared better as higher lending rates is certainly going to benefit them. Overnight, Asian stocks recorded declines and Wall Street futures also remained flat. But, this was more because of the renewed rise in the dollar as well as global bond yields because these signal tighter monetary policy conditions. The US Federal Reserve is scheduled for its policy meeting next week and it is expected to continue tightening its policy, which means higher rates.

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