European stock markets are likely to open lower as investors prepare for central bank decisions in the UK and US later this week.
As they fight the highest inflation rates in decades, these major central banks will likely raise interest rates.
On Thursday, the Bank of England will raise UK interest rates from 3.5% to 4%. This would be the highest rate since autumn 2008. The BoE could also revise its growth forecasts.
Also, the European Central Bank will likely increase borrowing costs by 50 basis points (half a%)
The US Federal Reserve takes its decision the night before and could slow down its tightening programme, possibly raising US interest rates by a quarter-point.
Recent weeks have seen stock markets rise, fueled by signs of price pressures decreasing and the hope that China’s lifting of Covid-19 restrictions will help lift the global economy.
Many investors believe that the central banks will reduce interest rates after rising sharply through 2022. Michael Hewson, CMC Markets, explains:
The sudden exuberance seen in US markets last week may have been driven by the belief that not just will the US economy avoid hard landing but that the Federal Reserve will signal a pause and not just another rate hike cycle of 25bps.
The belief that there could be a pause to the Fed’s rate-hiking cycle was reaffirmed last week when the Bank of Canada indicated that it was doing just that to assess the economic impact of the recent rate increases.
However, the central bankers could ruin the party – if that is what they do.
Hewson has the following to say:
As we examine this week’s trio of central bank meetings, we see that the Federal Reserve, ECB, and Bank of England have all painted a positive outlook. We also need to know what rate hikes we can expect after next week.
This caution appears to translate into a lower open today for European markets ahead of Q4 German GDP figures which are expected show a slowdown in the German economy.
The UK’s FTSE 100 dropped around 50 points at the open, or 0.6%, to 7717, the futures market suggests.
