By Matthew Vassallo
Much of the markets focus had been centred on yesterday’s interest rate decision by the European Central Bank. Whilst there was some speculation amongst economists ahead of the decision as to whether the ECB were likely to keep rates on hold, its members once again voted to increase the base interest rate by 0.25%, up to its current level of 4%.
This was the 10th consecutive time the ECB had chosen to raise the European bloc’s main interest rate and whilst European stock markets ended Thursday on a high, there was a more muted reaction in the currency markets, with the EUR failing to make any significant inroads against its major currency counterparts.
GBP/EUR rates have remained rangebound over recent weeks and whilst the Euro initially showed signs that it may rally against Sterling following yesterday’s rate decision, the move was muted and short-lived. The Pound ended the day up a quarter of a cent against its Euro counterpart, with the ECB’s monetary policy statement once again seemingly holding more weight with investors than the outcome of the rate decision itself. It was during this press conference that ECB chair Christine Lagarde attempted to calm fears that the central banks current strategy of aggressively hiking rates (the ECB have raised rates from -0.5% to its current level of 4% in just over a year) was not having the desire effect, with European inflation levels remaining “stubbornly” high. This has led some leading analysts within key financial institutions, such as JP Morgan & UniCredit Bank, to actively question whether the ECB’s seemingly unwavering rate hike strategy will ultimately lead the European bloc into a recession by the first quarter of 2024.
History tells us that the currency markets generally move aggressively on the back of economic uncertainty, which is rife and once increasing on a global scale. The US Fed have openly admitted that they cannot guarantee that increasing interest rates within the US economy will categorically have the desired impact in lowering inflation levels, which is currently robbing consumers of their purchasing power and is ultimately the key contributing factor to the current global economic stagnation. This fear is mirrored in Europe, with French supermarket Carrefour this week deciding to put stickers on its shelves warning shoppers of “shrinkflation” – which is where packet contents are getting smaller while prices are not.
As the European summer draws to a close are we actually any closer to the economic light touted by central banks across the bloc earlier this year, or are we set to enter another winter of souring living costs and discontent?