ECB Joins the Rate Hiking Party as Inflation Conundrum Rumbles On


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ECB Joins the Rate Hiking Party as Inflation Conundrum Rumbles On

The European Central Bank (ECB) pushed through a 50 basis point interest rate hike last week, the first upwards move in more than 11 years [1]. The base rate, which has sat below zero since 2014, now stands at 0.00% with further increases expected over the coming months as the ECB tries to tame surging inflation. Consumer prices rose by an annualised +8.6% during June, the highest figure ever recorded as a result of soaring energy and food costs. The Euro, which had fallen to parity with the US Dollar in part due to ECB inaction relative to the Federal Reserve, jumped by +1.5% against its American counterpart to €1.02.

Despite the ongoing deterioration in the economic picture, equity investors were in buoyant mood last week, perhaps on growing expectations that central banks will have to pare back rate hike plans as the economy slows. The S&P500 in the US rose by +2.6% with the technology heavy NASDAQ closing the week +3.3% higher. Closer to home, the FTSE100 and FTSE250 added +1.6% and +5.3% respectively whilst in Europe, the MSCI Europe ex UK index increased by +3.3%. Meanwhile in Asia, the Nikkei 225 in Japan rose by +4.2% after its central bank reaffirmed its commitment to ultra-loose monetary policy [2]. The Bank of Japan remains an outlier compared to central banks in the West, maintaining negative rates which has been a major contributor to the collapse in the Yen this year.

In the commodity markets, industrial metals bounced as sentiment towards riskier assets modestly improved. Copper climbed by +3.6% to $7,433 a tonne on hopes of increased Chinese demand although it has still fallen by more than -15.0% over the course of the last three months. Oil also edged higher with Brent Crude recoding a weekly rise of +1.9% to $103 a barrel largely due to higher demand in Asia. As for Gold, the precious metal benefited from some weakness in the US Dollar to record a weekly rise of +1.5% to $1,731 an ounce. [3]

Week Ahead

All eyes will be on the Federal Reserve this week as it hosts its latest monetary policy meeting. Expectations are for a 75 basis point increase in the Bank’s base rate to a range of 2.25-2.50% as it ramps up its own battle with inflation. In terms of key US data, the initial reading of Q2’22 GDP on Thursday is the standout number due with housing sales figures also released. It’s a quiet week of UK economic data with Friday’s consumer borrowing report from the Bank of England the only publication of note. The report will cover off various key indicators including the latest mortgage approvals and credit card borrowing statistics.

In the Eurozone, CPI inflation is due on Friday with the headline rate expected to have risen once again, this time by a +0.1% to +8.7%. Country level unemployment numbers are released throughout the week. It’s a busy week for Japanese figures with unemployment, industrial production and retail sales all published on Friday. There are no major numbers due from China on this occasion. [4]      


[1] European Central Bank, 25/07/22

[2] T.Rowe Price, 25/07/22

[3] Refinitiv, 25/07/22

[4] Forex Factory, 25/07/22


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