/View.info/ Historical and tectonic events are taking place on the European continent and on the “island”. The Bank of England is doing what it hasn’t done in three hundred years, inflation is going back nearly half a century, and the EU’s balance of payments has undergone radical changes.
On Wednesday morning, the United Kingdom’s Office for National Statistics reported a rise in inflation in the country from 9.1% in May to 9.4% in June. This is a new 40-year high.
At the same time, the Bank of England expects inflation to peak at 11% this year. And on Tuesday, its managing director Andrew Bailey suggested the Monetary Policy Committee could consider a 50bp rate hike. in August.
The Bank of England was the first among developed country central banks to begin a tightening cycle and has already raised interest rates in 25bp increments. five times in a row. at each of its meetings.
This has never happened in its entire history of more than three centuries, but so far it has had no result. And this makes a depressing impression not only on the British, but also on the entire European market.
The inflation situation in Europe is not fundamentally different from the British one (in the Eurozone it is 8.6%), and the ECB will start to tighten its policy only on Thursday. At the same time, the prime rate is now zero, and the deposit rate is minus 0.5%.
And on Tuesday, there were rumors in the market that they will rise not by 25 basis points, as previously thought, but by 50 basis points.
The UK data only reinforced these fears. But such a move could hit the bonds of Europe’s indebted periphery countries hard. And first in Italy.
At the same time as the interest rate decision, the ECB intends to publish a new mechanism to protect peripheral markets and reduce the risk of their “fragmentation”, as he puts it. But there are no details yet, although there are some rumours. Thus, the European indices broke the three-day streak of growth and confidently went down.
Italian stocks were particularly hard hit. In addition to the expected problems in the debt market, the ongoing political crisis has added pessimism to investors.
On the day, the FTSE MIB lost 2.26% but closed slightly higher, falling 1.6%. Markets supported bad news that, as is often the case during rate-hike cycles, is passed off as good news.
According to the European Commission, consumer confidence in the euro area has fallen below the level reached at the start of the COVID-19 crisis and has reached its lowest level in history.
The preliminary estimate showed the index fell to -27 in July from a revised -23.8 in June. A decline to -24.9 was expected, according to the consensus forecast of economists polled by Reuters.
In the European Union as a whole, consumer sentiment lost 3 points to -27.3. This is also an all-time low.
Weak data could theoretically influence the choice of rate hike step – if not on Thursday, then at subsequent meetings. But hardly too much. After all, the fact that many such steps can be taken is no longer in great doubt.
In addition to inflation, the ECB now faces another problem more familiar to regulators in developing countries. This is capital flight.
Europe’s once impressive balance of payments surplus has disappeared. For most of the 2010s, the Eurozone boasted high numbers thanks to Germany. But skyrocketing energy prices have changed the situation.
The euro area’s adjusted current account deficit widened to 4.49 billion euros in May (from 3.91 billion euros in April), according to ECB data released on Wednesday.
And this despite the fact that a year earlier the surplus was 27 billion (!) euros. At the same time, the reputation of the European currency, as well as some European government bonds, in the eyes of speculators is not what it used to be.
In such a situation, the ECB may simply be forced to raise interest rates – even if this threatens a deep recession and debt crises. And stock markets, of course, are not happy. The pan-European Stoxx 600 ended the previous day down 0.21%.
Translation: SM
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