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Europe Lets The Fed Go Right Ahead


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What's going on?

The message from the European side of the Atlantic on Thursday was clear: central banks are in no rush to increase interest rates. And that attitude could continue to fuel a rally in global stocks!

What does this mean?

Both the European Central Bank (ECB) and the Bank of England (BoE) concluded their most recent meetings on Thursday and (drum roll) neither changed their target interest rates. The ECB did note that the eurozone’s economy has picked up notably – but with inflation remaining subdued, it wants to keep rates low in an attempt to encourage borrowing, spending and subsequent higher demand pushing up prices.

Meanwhile, the BoE said it expects to raise interest rates, but only over the coming years (rather than months). UK economic growth is more precarious than elsewhere, and the BoE doesn’t want to drown it out in a premature flood of higher borrowing costs.

Why should I care?

For markets: Central banks’ support for stocks and other investments is receding – but very slowly.

The US Federal Reserve did increase its target interest rate on Wednesday – but it also indicated that it wouldn’t hike rates as sharply next year as many investors had expected. Many investors think that low interest rates (and accompanying policies, like quantitative easing) have encouraged investors to swap out of “safe”, low-return government bonds and into riskier investments, like stocks. The more gradual the withdrawal of this fuel, the better the environment for stocks globally (all else equal).

For you personally: Low interest rates look here to stay.

The outlook suggests that we will continue to live in a low-interest-rate world for years to come. Mortgage rates should remain historically low and riskier investments, including stocks and a certain thing called bitcoin, will continue to hold appeal, given the low interest rates available on savings. Just remember that there’s no guarantee interest rates will remain this low forever – and many of these attitudes could reverse if interest rates do go up.

Originally posted as part of the Finimize daily email.

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