Weekly Buzz: Europe's caught between a rate and a hard place

22 September 2023

In what seemed like a knife-edge decision, the European Central Bank (ECB) opted to raise interest rates by 0.25 percentage points last Thursday – its tenth-consecutive hike, as the central bank seeks to tame the bloc’s worst inflation surge in decades. 

Faced with a potential no-win situation

Experts were neatly split in their forecasts, with many hoping that the central bank would hold rates steady, which are already at historic highs, to avoid inflicting additional pain on the economy. But to be fair to the ECB, it was arguably in a no-win situation.

Not hiking would have invited criticism that it’s giving up too early in its battle against inflation, which is more than double the central bank’s 2% target. But hiking yet again risks making a looming economic downturn even worse.

All in all, the declining outlook for the economy was reflected in the ECB’s cut to its economic growth forecast for this year, from 0.9% to 0.7%. What’s more, it lifted its forecast for inflation this year from 5.4% to 5.6%, but sees it coming down further in 2025.

As an investor, what does this mean for me?

Experts now see a less than 20% chance of another hike from the ECB, which reflects concern over the region’s growth outlook. And economists widely expect that major central banks are collectively nearing the end of their aggressive rate-hiking cycles.

With those out of the way, you may be thinking about what happens next – and just how much these aggressive rate hikes might affect the global economy. Time will tell, but it might be worth playing it safe with your portfolio in the meantime.

This could mean investing in more defensive assets like bonds, or further diversifying your investments across regions. If you’re looking for more control over your personal investing strategy, our Flexible portfolios allow you to easily choose which assets to invest in.

This article was written in collaboration with Finimize.

📰 In Other News: China might be getting back on its feet

Data out on Friday suggested that China’s economy is gradually recovering. There’s been some gloomy news lately – but in August, both government stimulus and a summer travel boom helped bring some unexpected sunshine.

Retail sales, which tell us a lot about how consumers are feeling (more on this in our Jargon Buster below), rose by 4.6% compared to last year. That’s not just better than July: it’s also better than what most were expecting.

And factories have been busy too – mostly because carmakers have been in overdrive – with industrial production up by 4.5%. Throw in a drop in unemployment, and the fact that consumer prices aren’t falling anymore, and you’ve got signs of an economy on the mend.

While there’s been negativity surrounding China’s performance, a closer look at the numbers paints a brighter picture. For example, the nation is positioning itself for a sustainable future, via renewables and electric vehicles. And there’s more: China’s now crafting its own advanced chips, suggesting US efforts to curb its technological progress might be hitting a wall.

🎓 Jargon Buster: Retail sales

In economics, retail sales is just a catch-all term for everything people buy from stores, whether online or offline. Think of it as one massive, national shopping receipt. Economists pay close attention to these numbers because they offer a peek into how confident people are feeling. When consumers shop more, it usually means they’re feeling good about their finances. And when they tighten their wallets? It can signal that they’re a bit wary about the road ahead.

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