2 months ago • 2 mins
In what seemed like a knife-edge decision, the European Central Bank (ECB) opted to raise interest rates by 0.25 percentage points on Thursday – its tenth-consecutive hike, as the central bank seeks to tame the bloc’s worst inflation surge in decades. Investors and economists were neatly split in their forecasts, with many hoping that the central bank would hold rates steady to avoid inflicting additional pain on the economy.
To be fair to the ECB, it arguably was in a lose-lose position: not hiking would have invited criticism that it’s giving up too early in its battle against inflation, which is more than double the central bank’s 2% target and could still creep higher on the back of rising energy prices. But hiking yet again risks making a looming economic downturn even worse. The latest quarter-over-quarter economic growth figure in the bloc was recently revised downward, from 0.3% to a measly 0.1%, and fresh business activity surveys show that the services industry has started to follow manufacturing into a decline. Weaker global demand and China’s slowdown are weighing on European exports too.
This deteriorating outlook was reflected in the ECB’s cut to its economic growth forecast for this year (from 0.9% to 0.7%), and for next year (from 1.5% to 1%). What’s more, it lifted its forecast for inflation this year (from 5.4% to 5.6%), and for next year (from 3% to 3.2%).
So where do we go from here? Traders now see a less than 20% chance of another hike from the ECB, which drearily reflects the swelling concern over the region’s growth outlook. And economists widely expect that major central banks are collectively nearing the end of their aggressive rate-hiking cycles. But with those now out of the way, investors will (rightfully) worry about what happens next – and how much pain all those aggressive rate hikes might inflict on the global economy. Time will tell, but it might be worth playing it safe with your portfolio in the meantime.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
/3 • Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.