Interest rates

Euro hits two-year low on ECB interest rate caution

The euro hit a nearly two-year low this week as the European Central Bank stuck to its plans to taper economic stimulus while balancing record inflation with the economic impact of war. in Ukraine.

The common currency fell below $1.08 for the first time since May 2020 after the central bank’s monetary policy meeting on Thursday, and remained close to that level on Friday. The euro has lost almost 5% against the dollar so far this year, adding to a decline of 6.9% in 2021.

The ECB opted to leave interest rates unchanged as expected after its last policy meeting, but President Christine Lagarde noted that “downside risks to the growth outlook have increased significantly due to the war in Ukraine. “. Inflation will remain high in the coming months, mainly due to rising energy costs, she added.

Carsten Brzeski, head of macroeconomics at ING Research, blamed the currency’s decline on investors who have “get ahead” in recent weeks, expecting eight interest rate hikes by the end of the month. 2023.

“Lagarde’s comments. . . confirmed the rather gradual process of normalization,” he said.

The central bank said economic data released since its last meeting “reinforces its expectations” that its asset purchase program (APP) will end in the third quarter of the year.

Despite this, Frederik Ducrozet, strategist at Pictet Wealth Management, said the currency’s decline was due to the lack of a “strong hint or firm commitment” from Lagarde that the APP would end in June. . “It’s a reaction to the positioning of the markets ahead of the conference,” he said.

Inflation in the Eurozone has increased over the past year, with price growth reaching 7.5% last month. The US Federal Reserve and the Bank of England have already started raising interest rates in an attempt to dampen the intense price increases, but the ECB has indicated that it must first halt its bond purchases before increase borrowing costs.

ECB policymakers also have to deal with the impact of the war in Ukraine, which is expected to weigh heavily on the European economy.

“The supply shock implied by the war involves a difficult trade-off for the board of governors, given weaker growth and higher inflation,” Goldman Sachs analysts noted. The investment bank expects the ECB to raise rates in September, but said an increase in July would not be out of the question if inflationary pressures increase.

The ECB’s relatively dovish tilt failed to stem the sell-off in the bloc’s bond markets. The yield on the 10-year German Bund rose 0.13 percentage points this week to 0.84%, after starting the year at minus 0.18%.

US government bonds were also hit this week, with the 10-year yield rising 0.12 percentage points to 2.83%.

Unexpectedly weak U.S. core inflation data released earlier this week led investors to temper their expectations of how aggressively the Federal Reserve would raise interest rates, prompting higher bond prices. However, in an interview on Thursday, John Williams, chairman of the New York branch of the Federal Reserve, stressed the need to bring interest rates down “to more neutral levels.”

Most European debt and equity markets were closed on Friday for a bank holiday. Wall Street markets were also closed.

The benchmark US stock index S&P 500 fell 2.1% for the week, with the Nasdaq Composite down 2.6%. Europe’s Stoxx 600 was little changed while the broad measure of MSCI shares in the Asia-Pacific region fell 1.4%.