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Around the world, investors sold bonds on 3 February as central banks acted, or hinted at impending actions, to raise interest rates and end bond-buying programs that had been launched to stabilize COVID-era economies.
At a 3 February press conference, Christine Lagarde, president of the European Central Bank (ECB), refused to reiterate her often-stated position that the bank will not raise interest rates this year (see related story in this issue).
At the press briefing, Lagarde changed her tune saying inflation’s risk is “tilted toward the upside” after Europe’s inflation rate reached a 22-year record of 5.1 percent last month.
Although the ECB’s policy committee voted to hold rates steady this time, “one or two” members pressed for a rate hike now, persons familiar told the Financial Times.
Lagarde would not repeat her insistence that the ECB will hold rates steady through this year, “the situation having changed.”
Her comments were “a reality check” for markets, analyst Frederick Ducrozet at Pictet Wealth Management said to the FT, and traders interpreted Lagarde’s wording as indicating the ECB could raise interest rates as soon as next month, the FT noted.
Lagarde “opened the door to a speeding up of asset purchase reductions and a rate hike this year,” agreed Carsten Brzeski, ING’s chief of macro research.
The Bank of England (BOE) raised its key rate by a quarter of a percentage point twice in two consecutive meetings, with four of the nine rate-setting committee members pushing for a 0.5-point hike instead (see related story in this issue).
“Central banks have been wrong on inflation and now they’re needing to play catch-up,” Mark Dowding, chief investment officer at BlueBay Asset Management, said to the FT. “Financial markets don’t like what they’re hearing.”
TREND FORECAST: It’s a law of economic nature: when interest rates sharply rise, equity markets fall.
Bonds with yields that rise with inflation and many consumer-products stocks will stay above water as central banks continue to raise rates, but equity, housing, and other markets will suffer.
As we have said repeatedly, when the U.S. Federal Reserve pushes its key rate to 1.5 percent to 2 percent, U.S. markets will tank.
The same goes for the EU. Their economy has long been artificially inflated with negative interest rates and massive quantitative easing. When interest rates in the EU rise above 1 percent, the entire zone will sink into a deep recession. And as economic conditions decline, there will also be geopolitical unrest rising throughout the region.
As rates rise, so will prices for gold, silver, and increasingly scarce industrial metals such as cobalt and lithium.