European stocks waver at end of week dominated by monetary policy

European stocks stalled on Friday at the end of a week in which several major central banks acknowledged the threat posed by high inflation and the Omicron coronavirus variant.

The region-wide Stoxx 600 index slipped 0.3 per cent in early dealings, with London’s FTSE 100 up 0.2 per cent and Germany’s Dax and France’s Cac 40 each down around 0.3 per cent. The muted performance contrasted a technology-driven slide on Wall Street overnight.

Despite cases of Covid-19 soaring across the UK, the Bank of England on Thursday voted to raise interest rates to 0.25 per cent from 0.1 per cent in an attempt to damp inflation that has risen far above its target. Markets are now pricing in a roughly 70 per cent chance that the bank will raise rates further at its next meeting.

Programme

Later on Thursday, the ECB said it would scale back its pandemic-era bond purchasing programme in response to surging prices, although officials indicated they were unlikely to raise rates until at least 2023.

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Those announcements came a day after the Fed pledged to speed up the taper of its $120 billion (€105 billion) per month stimulus programme, which is now due to end in March rather than June, while signalling that three interest rate rises might be necessary next year.

US equities fell on Thursday, erasing gains in the trading session following the Fed’s hawkish policy announcement, with the tech-heavy Nasdaq Composite enduring its worst day since late September and the benchmark S&P 500 falling 0.9 per cent. US stock-index futures were little changed early on Friday.

Of the three central bank announcements, however, it was the BoE’s that came as most of a surprise. Bank of America wrote in a note that it had assumed UK officials would wait “for more information about the impact of Omicron” before raising rates.

Flexibility

“In the event, economic data this week – hawkish inflation and labour market data – appears to have dominated the BoE’s thinking”, it said.

In contrast, Frederik Ducrozet, senior strategist at Pictet Wealth Management, said the ECB’s monetary policy announcement contained “no major surprise overall relative to consensus expectations”.

"The basic principle that president Christine Lagarde hammered home is that the ECB needs to retain maximum flexibility and policy optionality in the current uncertain environment dominated by Omicron concerns, an energy crisis, supply bottlenecks and inflationary pressures", he wrote in a note.

In Asia, meanwhile, Hong Kong’s Hang Seng dropped 1.2 per cent and Tokyo’s Nikkei 225 fell 1.8 per cent. – Copyright The Financial Times Limited 2021