European markets fall after ECB raises interest rates

European stocks fell on Thursday after the European Central bank lifted its main interest rate to its highest level in 22 years and signalled more tightening to come.

The benchmark Stoxx Europe 600 was down 0.8 per cent following the ECB announcement, while Germany’s Dax fell 0.9 per cent, France’s Cac 40 dropped 1.1 per cent. London’s FTSE added 0.1 per cent.

The central bank increased its deposit rate in line with market expectations on Thursday, by 0.25 percentage points to 3.5 per cent, its highest level since July 2001.

The bank, which is also set to publish updated forecasts for growth and inflation later on Thursday, repeated that it expected inflation “to be too high for too long” as it would not return to its 2 per cent target for another two years.

In government debt markets, the policy-sensitive two-year German Bund was up 0.14 percentage point at 3.182 per cent, while the 10-year debt was up 0.086 percentage points at 2.534.

The yield on the US Treasury two-year note added 0.05 percentage points to 4.76 per cent. The yield on the benchmark 10-year note gained 0.02 percentage points to 3.82 per cent. Bond yields fall as prices rise. 

The majority of investors now expect that the eurozone’s policymakers will go ahead with another quarter-point rate increase when they next meet on July 27.

Meanwhile, stocks rallied in Asia after the People’s Bank of China cut its medium-term policy rate in the face of slowing economic growth.

The Hang Seng China Enterprises index, which tracks mainland Chinese companies listed in Hong Kong, rose 2.2 per cent and the CSI 300 of Shanghai- and Shenzhen-listed stocks gained 1.6 per cent.

The gains came after the PBoC lowered its medium-term lending facility rate by 0.1 percentage point to 2.65 per cent, having cut its seven-day lending rate earlier in the week by the same amount, which was its first move to boost short-term liquidity in the country’s interbank market in nine months.

Data released alongside the announcement underscored the slowing pace of China’s economic recovery. Growth in industrial output and retail sales fell short of economists’ expectations, while the pace of contraction in property investment and sales also worsened in May.

Analysts were sceptical that the cut to the medium-term rate, which serves as the floor for China’s benchmark prime loan rate, would be enough to get growth back on track.

“The underlying story on the economy is extremely disappointing right now,” said Robert Carnell, head of Asia-Pacific research at ING. He said the renminbi could weaken to Rmb7.2 against the dollar “in days” and that policymakers would regard a weaker currency “as one of the policy tools they will need to lean on to help the economy”.

The moves come a day after the US central bank announced a widely-anticipated decision to keep the federal funds rate steady, maintaining its target range of between 5 per cent to 5.25 per cent. 

The meeting marked the first pause in more than 14 months of the Fed’s aggressive tightening campaign aimed at bringing down persistently high inflation.

Overnight on Wall Street, the benchmark S&P 500 finished 0.1 per cent higher in a choppy session, while the tech-heavy Nasdaq Composite climbed 0.4 per cent.

The dollar, which strengthens when investors expect higher rates, gained 0.3 per cent against a basket of six peer currencies.

Contracts tracking the S&P 500 slipped 0.3 per cent and those tracking the Nasdaq 100 lost 0.6 per cent ahead of the New York open.