As inflationary pressures continued to mount last week, the European Central Bank (ECB) revealed it would raise its key interest rate by 0.25% at its July monetary policy meeting.
This will mark the first rate rise in the region in over a decade.
As the ECB’s rate is currently -0.5%, even after this increase, it will remain negative. But with inflation looking persistent, the Bank also said it expects to raise interest rates again in September, meaning rates could turn to zero or become positive.
In May, inflation hit 8.1% in the EU – far exceeding the Bank’s target of 2%. The ECB said it expects inflation to average 6.8% for 2022, falling to 3.5% in 2023 and 2.1% in 2024. This is higher than its previous projections.
“Russia’s unjustified aggression towards Ukraine continues to weigh on the economy in Europe and beyond. It is disrupting trade, is leading to shortages of materials, and is contributing to high energy and commodity prices,” President of the ECB Christine Lagarde commented.
“These factors will continue to weigh on confidence and dampen growth, especially in the near term. However, the conditions are in place for the economy to continue to grow on account of the ongoing reopening of the economy, a strong labour market, fiscal support and savings built up during the pandemic.”
Although the ECB has so far been slower than the UK and US in raising its rates, several commentators said they expect the rate rise in September to be larger than 0.25%. Increasing interest rates typically slow the performance of ‘growth’ company shares – such as those in the technology sector and may lead to a rotation towards more ‘value’ orientated companies.
“The ECB is unwilling to do 50 basis points in July mainly because they don’t want to take rates to zero in one go. Ms. Lagarde referred to the need for a gradual first step in lifting interest rates, referring to 25 basis points as “good practice,” said Claus Vistesen, Chief Eurozone Economist at Chief Eurozone Economist Pantheon Macroeconomics.
“50 basis points in September seems like a done deal. The President explicitly said that if the medium-term inflation expectations remain unchanged, they will hike by 50 basis points. We doubt that the central bank will be in a position to lower its medium-term inflation outlook by September, and as such, we have to believe in a 50bp hike,” he continued.
With high inflation and incoming rate rises, it is perhaps unsurprising that European markets struggled last week. The MSCI Europe ex. UK index closed the week -4.4% lower.
In the US, markets also continued to struggle.
After the US Bureau of Labor Statistics revealed inflation hit 8.6% in May – notably higher than many expected and the highest rate since 1981 – the S&P 500 and the NASDAQ fell, ending the week down 5.1% and 5.6% respectively, their worst weeks since January.
While this may sound alarming, Mark Dowding, Chief Investment Officer at Bluebay, thinks the medium-term situation doesn’t look quite so dire.
“US economic activity data remains relatively healthy, and with consumer and business balance sheets in strong shape, we continue to see recession as a risk case, rather than a central probability. Further evidence of the underlying strength of the US economy is shown in fiscal data, with the US Federal deficit shrinking at a rapid rate.”
The economic situation in the UK is also experiencing economic headwinds. The very start of this week revealed the UK’s GDP unexpectedly shrunk in April by 0.3%, prompting fears the UK may experience a recession this year.
In reaction, Tony Danker, the Director-General of the Confederation of British Industry said: “Let me be clear – we’re expecting the economy to be pretty much stagnant. It won’t take much to tip us into a recession. And even if we don’t, it will feel like one for too many people.”
With the Bank of England due to meet later this week, it seems likely further interest rate rises are on the cards.
Life can be very challenging for carers. The number of people caring informally for aged relatives is likely to continue rising as the older generation live for longer. The ranks of ‘sandwich carers’, who look after both their children and an elderly parent, are expected to swell too, as the average age when people first become parents is increasing.
Carers are often very busy moving between commitments and, consequently, too many of them are left floundering on their own because they don’t know where to turn for confidential advice. Even ten minutes spent browsing the website of a reputable group, such as Age UK or Care UK, can help you feel supported and informed about the wider issues around care.
Financial advisers are perceived as being experts in tax and inheritance, which they are, but much of their work also involves helping families find and pay for appropriate care. This includes helping people who have become unpaid carers.
Many family carers have checked the financial status of their elderly relative with regards to their entitlement to help with care costs. As some state benefits may begin after a period of time, or if a parent’s needs have changed, it is worth rechecking periodically.
For some families, bringing in professional carers on a temporary basis may be an option, which will give unpaid carers a break. Our advisers can outline how much you can expect to pay for care as well as advising on managing costs and anticipating any issues that could arise.
At times, the wider family may have input into the care of elderly parents, but their perspective may conflict with the carer’s, both in terms of what should happen to their parent and how much should be spent on their care. Other family members can sometimes have an eye on inheritance, so a neutral party such as a financial adviser may be needed to step in.
We often say it is about time in the markets, not timing the markets. It can be impossible to predict significant market bounces. As shown below, missing out on the best performing months over the last 30 years would have had major repercussions for long-term returns.
Past performance is not indicative of future performance.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested
“What really matters for economic success is innovation. If we want our country to succeed we need to do what we’ve always done, and embrace new technologies and the people and culture that create them. No serious analysis of our prospects could conclude anything different.”
Rishi Sunak discusses the role innovation will play in the UKs future.
Bluebay are fund managers for St. James’s Place.
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