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The European Central Bank and Bank of England refused to declare victory over inflation, dampening a market rally sparked by the US Federal Reserve indicating that it would cut interest rates next year.
Christine Lagarde, ECB president, warned on Thursday that there was “work to be done” before inflation fell to its 2 per cent target while Andrew Bailey, BoE governor, said there was “still some way to go” in the UK.
Both of the central banks held interest rates steady, the ECB at 4 per cent and the BoE at 5.25 per cent, with Lagarde cautioning “we should absolutely not lower our guard” against consumer price pressures.
The Fed had also held rates a day earlier, at 5.25 per cent to 5.5 per cent, but provided forecasts showing US officials believe rates will end next year at 4.5 per cent to 4.75 per cent — implying three quarter-point rate cuts.
The unexpectedly dovish stance from Fed chair Jay Powell boosted markets on Thursday morning, with both stocks and government bonds surging on the hopes of global rate cuts.
In New York, stocks extended a rally triggered the previous day by the Fed’s shift. The benchmark S&P 500 was up 0.5 per cent on Thursday, within 2 per cent of an all-time high.
“It’s a bumper early Christmas present” from the Fed, said Charles Hepworth, investment director at GAM Investments.
But the more hawkish stance from the BoE and ECB sapped the life out of the rally. The region-wide Stoxx Europe 600 rose 0.9 per cent, led higher by big gains for rate-sensitive real estate stocks. London’s FTSE 100 added 1.3 per cent, while France’s CAC 40 rose 0.6 per cent, falling just short of an all-time closing high.
“Markets were starting to smell a global pivot by central banks after the Fed shifted decidedly dovish last night,” said Matthew Landon, global market strategist at JPMorgan Private Bank. “The BoE didn’t quite follow suit.”
The BoE’s Monetary Policy Committee said interest rates would need to be kept high for an “extended period of time” and it left open the option of further rate rises if necessary. “There is still some way to go. We’ll continue to watch the data closely, and take the decisions necessary to get inflation all the way back to 2 per cent,” Bailey said.
The MPC voted six to three to keep the central bank’s key rate at its highest level in 15 years.
After the ECB maintained its benchmark deposit rate at its highest-ever level of 4 per cent for the second consecutive meeting, policymakers repeated their determination to keep borrowing costs at “sufficiently restrictive levels for as long as necessary”.
The eurozone’s central bank forecast consumer price growth would slow to its 2 per cent target within the next three years — clearing a key hurdle for them to consider cutting rates. But Lagarde said policymakers would be “a little bit more severe” and aim to hit that milestone by 2025.
In bond markets, the yield on rate-sensitive two-year US Treasuries touched a fresh six-month low at 4.28 per cent, down almost a full percentage point from the 17-year highs it hit just two months previously, before recovering to 4.36 per cent. Two-year German Bund yields, the eurozone benchmark, fell 0.06 percentage points to 2.59 per cent. Ten-year gilt yields were 0.05 percentage points lower at 3.79 per cent.
The dollar weakened 1.1 per cent against a basket of peers while gold added 0.4 per cent to $2,035 per troy ounce.
Additional reporting by Stephanie Stacey in London
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