6 months ago • 2 mins
The European Central Bank (ECB) just hiked interest rates by a quarter of a percentage point, bringing the bloc’s key rate to a whopping 3.5% – a high we haven't seen since 2001. The ECB isn't being coy about things either, warning that this rate-hike saga may continue through the summer.
The ECB also said it’ll put an end to reinvestments in its bond-buying program next month, which had been keeping interest rates on the lower side and liquidity on the higher side. And in case you thought there was going to be a sliver of optimism from Europe’s monetary authority, there wasn’t: the Bank also revised down its macroeconomic outlook, forecasting higher inflation and lower economic growth.
That’s going to make it hard to get excited about the investing prospects for the region. But, on the bright side, most of this was what investors had expected. So the market mostly took this news in its stride.
The inflation dragon is under attack in much of the world as central banks get closer to slaying it with some aggressive interest-rate increases. But it’s not going down without a fight: the “core” measure of inflation, the one that excludes the more volatile food and energy prices, is still stubbornly hot. And that suggests that we could see a few more rate hikes on the horizon.
Thursday’s hike from the ECB is in line with the pattern we've been seeing in the past few weeks. Central banks in Australia and Canada both resumed rate increases this month, having previously hit the pause button, and that caught a lot of investors a bit off guard. And the US Federal Reserve echoed a similar tune on Wednesday – pausing its 10-hike rate cycle, but warning that additional rate hikes will likely be on the table before the year bows out.
The economy's been flexing its muscles alright, but so has core inflation, and that’s especially true in Europe. This means that more rate hikes might be needed to cool that core level, and that investors longing for rate cuts might have to play the waiting game, even if the economy really hits the brakes.
And sure, despite a few bad blows, the financial system's mostly taken these interest rate hikes like a champ so far. But even champs falter under prolonged pressure. With rates at these elevated levels, the risk of a financial hiccup grows. And that kind of thing could very well happen right when the effects of all those rate hikes start to really pinch the economy. In fact, bond investors in the US and Europe are banking on it, as inverted yield curves reflect the expectations that those economies aren’t likely to avoid a recession.
So it’s an incredibly delicate balance between inflation weakening and growth remaining strong. Prepare yourself, because this roller-coaster ride won’t likely get any smoother in the coming months.
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.