It has been a lower week for investment markets as concerns over weakening economic sentiment and high inflation persist.
Following months of inflation climbing significantly above target, the European Central Bank (ECB) set out plans on Thursday to end its eight-year policy of negative interest rates. The bank announced that it will stop its bond buying program and raise interest rates by a quarter point in July. The planned increase will bring the interest rate from its current -0.5% to -0.25%.
The ECB is one of the last of the major central banks to raise rates, and the focus now turns to the size and pace of future rises. The ECB said it was likely to “raise the key ECB rates again in September”, ending the era of negative interest rates. This counterintuitive practice sees an investor lend money (by buying a bond) to governments and some highly rated companies for a guarantee of getting less back at a future date. This idea was hard to comprehend when inflation was near zero and is now very painful on a real return basis in this high inflation environment.
With the Euro currently sitting near its record low against the dollar, the increase in interest rates could see the currency strengthen in the coming period. This won’t be welcomed by the exporting companies inside the eurozone but should help tame some of the inflationary pressures in the energy market as many of the orders are settled in dollars.
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John Naylor, Chartered FCSI – Head of Investment Committee