European markets were lower on Thursday as the interest rates were lifted in Switzerland, Norway and the UK and sentiment was hit by hawkish comments from the US Federal Reserve.
The pan-regional Stoxx 600 index was down 0.97% at 1207 GMT. Investors are also braced for a rate decision from the European Central Bank at 1.15 GMT.
Norway’s central bank lifted its benchmark interest rate on Thursday by 25 basis points to 2.75%, as expected. This marks the highest level since February 2009. Norges Bank noted that consumer prices have risen rapidly, and inflation is markedly above target.
“Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised further in the first quarter of next year,” it said.
The Swiss National Bank lifted its key policy rate on Thursday by 50 basis points to 1.00%, in line with expectations.
This marked the third rate hike this year. The SNB said it was aiming to tackle “increased inflationary pressure and a further spread of inflation”. Inflation in Switzerland stood at 3% in November, which is well below the 10.7% rate of inflation seen in the UK and 10% in the eurozone.
The Swiss central bank also warned that further rate hikes could not be ruled out “to ensure price stability over the medium term”.
The Bank of England hiked rates by 50 basis points on Thursday, as expected, as it looks to tackle surging inflation. At 3.5%, interest rates are now at their highest level since October 2008. Last month, the Bank hiked rates by 75 basis points, which was the biggest increase for 33 years.
Data released on Wednesday by the Office for National Statistics showed that consumer price inflation in the UK eased to 10.7% in November from October’s 41-year high of 11.1%, as transport costs fell back. This was below consensus expectations of 10.9%.
The Fed on Wednesday raised interest rates by half a percentage point after delivering four consecutive 75 bps hikes, but signalled more increases in borrowing costs by the end of 2023.
“I wish there were a completely painless way to restore price stability,” said the central bank’s chair Jerome Powell. “There isn’t, and this is the best we can do.”
US and Asian markets both fell on the news and Powell’s downbeat remarks. To add to the gloom, a China data dump for November showed worsening conditions due to strict Covid 19-related curbs.
“Safe to say, investors simply didn’t see that coming. Two months of better-than-expected inflation data were enough to convince them that the Fed would not only ease off the brake but signal it would do so more in the coming months,” Oanda analyst Craig Erlam.
“The question now becomes whether other central banks will take a similarly hawkish position against the markets and ruin any hope of a Santa rally this year. Of course, that very much depends on the individual circumstances. Take the BoE for example, it has already been pushing back against market expectations but in a very different way, with the message from the MPC being that it doesn’t expect to tighten as aggressively as the economy falters.”
“The ECB faces other challenges, most notably the fact that inflation is still 10% and it was very late to the party when it comes to raising interest rates. At the same time, the bloc faces a period of huge economic and energy uncertainty and probably recession. The central bank is expected to slow the pace of tightening today following two consecutive 75 basis point hikes but the economic projections are what will likely get the most attention as traders try to determine just how far the central bank plans to push rates.”
In equity news, shares in fashion chain H&M fell despite a better than expected fourth quarter.
Reporting by Frank Prenesti for Sharecast.com
