European markets fall ahead of key ECB interest rate decision

European markets started the session in the red on Wednesday, while the FTSE 100 index remained unchanged in anticipation of a key decision by the European Central Bank (ECB) on interest rates.

Frances CAC 40 fell 0.23% to 6,877.43, while Germany’s DAX fell 0.14% to 14,857.11.

Meanwhile, the FTSE 100 index increased slightly, by 0.07%, to 7,394.78 points.

The cautious market mood follows a string of earnings reports this week, and as investors consider the next monetary policy path the ECB may take on Thursday afternoon.

We expect the ECB to maintain a dovish stance on Thursday, keeping interest rates unchanged and warning that rising risks to the outlook require greater caution, said Matthew Ryan, head of market strategy at financial services firm Ebury. Since the last meeting, inflation in the bloc has fallen, data on economic activity has deteriorated and geopolitical risks are rising.

In particular, this week’s PMI data was simply disastrous and all but eliminated the possibility of additional tightening of monetary policy, he added.

Ryan also noted that with no policy changes expected for some time, ECB President Christine Lagarde is likely to issue a non-committal note on interest rates this week.

However, we will pay special attention to decision-makers’ views on growth prospects, which currently seem crucial for the timing of interest rate cuts, he said. If Lagarde expressed increased concerns about the possibility of a recession while pointing to geopolitical tensions and a sharp rise in government bond yields as risks to the economy, then the euro would likely sell off.

Meanwhile, Daniela Hathorn, senior market analyst at Capital.com, stressed to Euronews Business that yields rose across the euro zone ahead of the interest rate decision, which helped tighten monetary conditions. strengthening the ECB’s position to maintain interest rates.

Recent tensions in the Middle East have also raised concerns about the region’s already deteriorating growth prospects. But with oil prices increased since the last meeting and with the likelihood that they will remain elevated until the threats in the Middle East region subside, we may see upward pressure on inflation in the future, which could make life for the ECB significantly more difficult, she said.

Hathorn further noted that before the pandemic, most central banks considered rising oil prices to be somewhat deflationary because they reduce purchasing power and competitiveness.

However, in the current inflation environment, where getting inflation back on target has been a real concern for policymakers, we can see that the ECB prefers greater recession risks to undermining its credibility in controlling inflation. This could mean further increases in interest rates, although this is unlikely at this week’s meeting, she added.

A market analyst said Lagarde’s hawkish comments would likely continue to appear at the news conference after the interest rate announcement, even if there is no increase this time.