A record rise in European interest rates, the PMs energy support package and a positive week for equity markets. Read on to see how markets shape up this week.
Record rise in European interest rates
The European Central Bank (ECB) raised all key interest rates by 0.75%, the largest rise in its history. Markets had forecast a rise of 0.5%-0.75% after August inflation data showed an 8.9% year-on-year increase across the bloc. The ECB now expects inflation to stay higher for longer and to be accompanied by stagnant economic growth for the rest of 2022 and 2023. The ECB indicated that there will be further interest rate rises at upcoming meetings.
Unlike other central banks, the ECB has not yet started its quantitative tightening programme, despite surging prices across the bloc. However, at their latest meeting they reiterated that the bond purchasing programme started during the pandemic would be conducted flexibly until the end of 2024. This allows the ECB to continue supporting less fiscally stable countries, such as Italy, by allowing their bonds to make up a larger portion of the ECB’s balance sheet.
UK’s new PM announces vast energy support package
At her final public engagement, Queen Elizabeth II appointed Liz Truss as the UK’s new prime minister on Tuesday 6 September.
Among her first actions as PM, Ms Truss announced a support package to help households and businesses weather the extreme energy price rises caused by Russia’s invasion of Ukraine. The cost of the package is expected to exceed £150bn. Whilst the news came as welcome relief to many, it was immediately overshadowed by the announcement that the world’s longest-serving monarch had died on Thursday.
Details of the package are yet to be announced, particularly in relation to support for businesses, but the initiative should mean that UK inflation peaks earlier than expected and lower than the 22% level forecast by Goldman Sachs. However, sterling’s recent weakness and the fact that consumer energy prices will still increase in October make a further interest rise in September increasingly likely. The market is currently pricing in a 0.5% rise that would take UK rates to 2.25%.
Market review
It was a largely positive week in equity markets, with the MSCI All Countries World Index ending the week up almost 3%. The Nasdaq was the best performer among the major indices, ending up over 4%.
UK bond markets declined, the BAML UK Gilt index falling by 2% over the week and the BAML 10+ Year Gilt index down almost 4%.
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