European stocks rally as central banks toughen their stance on inflation

European markets continued to rally strongly on Thursday after the Bank of England followed the Federal Reserve in taking a more aggressive stance in reversing high levels of inflation.

London’s FTSE 100 index maintained gains in the early morning after the BoE decision, up 1%. The pound rose 0.8 percent against the dollar to $1,337, its strongest level in three weeks. Markets in mainland Europe edged higher, pushing the region’s Stoxx 600 up 1.7 percent, while U.S. stock index futures also rose.

The BoE’s Monetary Policy Committee voted January 8 on Thursday to raise the rate from 0.15 percentage points to 0.25%, surprising some economists, who had expected The BoE will keep the fire alive due to the rapid spread of the Omicron coronavirus variant.

Investors sold UK government bonds following the BoE decision, pushing the gold-plated 10-year yield up 0.08 percentage points to a two-week high of 0.81%. The selling also spilled over into eurozone debt, with German 10-year yields rising 0.04 percentage points to minus 0.33 percent.

Policymakers at the European Central Bank on Thursday also confirmed plans to end net buying under the central bank’s pandemic-era bond-buying program next March. However, in the second quarter of next year, the ECB will increase the rate of bond purchases under another scheme by 20 billion euros to 40 billion euros, before reducing it to 20 billion euros starting October 2022.

Thursday’s policy decisions come a day after the Fed, the world’s most influential central bank, announced that it would accelerate the pace of reductions in its massive pandemic-era stimulus program. , with bond purchases now ending in March, not June. .

Central bank officials also signaled in the economic outlook that they plan to raise interest rates three times over the next year, marking an escalation in efforts to rein in price growth. Fed Chairman Jay Powell said the measures were needed to address what he described as “high levels of inflation”.

The higher prices were the result of “supply and demand imbalances related to the pandemic and the reopening of the economy”, Mr. Powell said, adding that the problems were “bigger and dragging”. longer than anticipated, exacerbated by the wave of the virus.”

However, despite more hawkish interest rate forecasts, US markets rallied sharply in the hours following the central bank’s announcement, with the benchmark S&P 500 index closing at its second-highest on record and trading. The tech-heavy Nasdaq is up 2.2% on the day. . S&P 500 futures were up about 0.7% Thursday morning in Chicago.

“As Powell spoke, he sounded a little more confident in the economy and turned more hawkish than expected,” said Steve Bartolini, portfolio manager at T Rowe Price. “But given the market’s reaction, he’s not as brazen as feared.”

Powell, meanwhile, has a positive outlook on growth, saying that economic activity “is on track to expand at a strong pace this year”.

While the arrival of Omicron poses risks to that outlook, Ron Temple, head of US equities and co-head of multi-strategy at Lazard Asset Management, said Powell has sent “a signal that this is an economy that is still developing cylinders.”

“There is a lot of consumer demand despite the Delta wave, despite the fear of Omicron,” he said. “And I think [the Fed] correctly hit the matching balance. And maybe that’s why the market is reacting the way it is. ”

Additional reporting by Eric Platt and Kate Duguid in New York