The European Central Bank (ECB) has joined the US Federal Reserve and raised its interest rate by a larger than forecast 75 basis points to tackle record inflation.
The ECB’s long awaited rate rise didn’t hit European sharemarkets which rose over the day as investors shrugged off fears the eurozone is already heading into recession because of surging energy prices.
The move lifted the ECB’s deposit rate to 0.75% from 0%.
In the US, Wall Street fell then rose in the wake of the ECB’s news and comments from Fed chair Jay Powell who made clear the US central bank would not be easing its rate rise campaign.
Mr Powell signalled that a pause in the Fed’s rate hikes or a pivot to cutting interest rates is not coming soon.
“History cautions strongly against prematurely loosening policy,” he said. “I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done.”
The Dow ended up 193.24 points, or 0.61%, to close at 31,774.52. The S&P 500 rose 0.66% to 4,006.18, and the Nasdaq Composite added 0.60% to 11,862.13.
Gold fell, oil rose, iron ore rose back over $US100 a tonne – just, by a few cents. Copper rose as well.
Thursday also saw a number of US banks change their tips for the size of the next Fed rate rise.
Economists at Nomura changed their forecast for the Federal Reserve’s rate hike, now expecting a 0.75% increase instead of a 0.50% one.
Goldman Sachs and Bank of America have the same estimate for September. It’s also what markets have currently priced in – traders see an 86% chance of a 0.75% rate hike later this month, up from a 77% chance one day ago.
The ECB’s rate rise was seen as a catch up move and investors were looking to Powell’s comments for guidance.
They got that – no change.
Powell’s comments were strongly supported by the head of the Chicago Fed, Charles Evans who said in separate remarks that the Fed “could very well do” a 75-basis-point increase at its meeting on September 20-21 That would be the third such increase in a row and push the Fed’s target interest rate above 3% for the first time since 2008.
“We are going to have a conversation about that,” Evans was quoted as saying. “I’m going to be listening to everybody. My mind is not made up.”
In his remarks Powell made it clear that the Fed will not back down on planned rate increases despite possible risks to employment and economic growth.”We need to act now, forthrightly, strongly as we have been doing, and we need to keep at it until the job is done,” Powell said.
“History cautions against prematurely loosening policy,” he said.
