EU rate hikes could be a remedy rather than a threat

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European stocks have failed to rebound from last week’s lows. The Xetra Dax 40 continues to decline despite the National Purchasing Managers’ Indicator (PMI) coming in at 54.6 points and beating consensus expectations of a potential decline to 54.0. The index also registered its first rise since the start of the military conflict in Ukraine. However, a similar indication for the Eurozone region fell from 55.8 points a month ago to 54.9 points today.

In France, the production and service components lost nearly half of what was expected according to expert surveys. But that hasn’t helped France’s CAC 40 index. Britain’s FTSE 100 is neutral at the moment, showing its ability to catch up. Investors are more tolerant of UK companies this year than mainland companies. The British Isles FTSE 100 index is only 2.5% below its annual peak, unlike the Euro Stoxx 600, which has lost more than 12% since the start of 2022, comments Alex Boltyan, l Esperio analyst.

This may have happened because the UK is privileged to pursue its own economic and financial policy, which does not need to confront the EU, and moreover, it usually does not take so many time in London to build consensus on particular issues in relation to the diverse community of EU countries. The British economy is less exposed to Russia in terms of energy supply, capital flows or trade. The Bank of England was the first to raise interest rates among other major financial regulators and has done so four times since December 2021, unlike the European Central Bank (ECB), which only argues for the now plans to raise interest rates and other anti-inflationary measures.

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An explicit and widely discussed call for two interest rate hikes by ECB chief Christine Lagarde could bring investors back to the continent. He just wrote a blog Monday saying net purchases under the asset purchase program will end “very soon in the third quarter,” which “allows us to raise rates at our July meeting.” , as does the ECB. “be able to exit negative interest rates by the end of the third quarter.”

European bank deposit rates are now at -0.5%, forcing investors who keep their funds in ECB accounts to pay for security. Taking deposit rates into positive territory would clearly mean two 0.25% hikes and this could be the first action to combat the inflationary storm. Secondary effects could, however, lead to some reduction in credit assets for the real sector of the EU economy.

The continued normalization of interest rates to more appropriate levels should give new impetus to market confidence. So that’s a good sign. The risks that inflation could ruin corporate profits due to rising costs (such as high gas prices) have heightened after recent alarming reports from US dealers. The responsibility of regulators on this side of the Atlantic is to do everything possible to reduce the impact of these risks.

Recent comments from Christine Lagarde supported EURUSD to gain 1.5% and hit near 1.0735 on Tuesday after the euro fell to a low of 1.0350 on May 13 as it failed done for 20 years. A more expensive euro may hamper trade to some extent, but some monetary stability is a necessary condition for business and investment. However, the EURUSD is unlikely to strengthen too much as interest rates in the United States exceed those in Europe.

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