The season of aggressive interest rates hikes started

Market commentary by eToro analyst for Romania, Bogdan Maioreanu

 The Fed raised the key policy rate by 0.75%, the biggest hike from 1994, signaling further increases in order to curb inflation. After the hike, the rate is at 1.75% but Jerome Powell, Fed Chair sees it in the range of 3 to 3.5% by the end of the year calling it “a modest restrictive level”. The bigger than expected hike also gave a strong signal to other Central Banks that it is time for action. In a surprise move, the Swiss National Bank raised the interest rate with 0.5% to -0.25%, the first hike in over 15 years. The Bank of England made its fifth increase with 0.25% to 1.25% while raising the peak inflation projection to 11%.

Romania’s interest rate of 3.75% is still low compared with the neighboring economies but National Bank of Romania governor, Mugur Isarescu reiterated that cannot afford to see the gap widening  without the risks of seeing the capitals flowing toward other markets. Poland’s interest rate is at 6% with an inflation of 13.9%, Hungary is at 5.9% with an inflation of 10.7% and Czech Republic is at 5.75% with an inflation rate of 16%.  Romania’s inflation rate is at 14.49% and it is very likely to see in the next BNR meeting in July a more aggressive interest rate increase exceeding the 0.5% that is currently estimated by the analysts.

While the Fed is using a bigger hose now to fight inflation fires, the European Central Bank (ECB) is still contemplating the possibility of raising rates. Policy makers pledged to stop bond purchases on July 1, and to deliver interest-rate increases in September. But in Italy, the bond yields increased rapidly, at one point breaching 4% to close the gap with the 7.3% estimated inflation, triggering concerns about a new sovereign debt crisis. The ECB initial response remains using reinvestments of their pandemic purchase program with more versatility. Inflation rate in the Euro area is 8.1% with energy prices as the main drivers.

The high inflation is forcing an increasingly aggressive attitude of Central Banks in raising interest rates. The purpose is to slow down demand, economic growth, and therefore inflation. Higher interest rates and bond yields make loans more expensive, and are cutting valuations. This has driven the sell off in the markets so far. Some of the  investors also rotated their portfolios toward dividend and value shares leaving behind the growth and highly valued tech sector that requires external financing to function. A faster economic slowdown or potential recession raises the risk to company profits too. These have been unaffected so far but  in a recession could fall 20-25%.

Analysts are seeing a possible recession on the horizon. A recent poll from Financial Times and University of Chicago is showing that almost 70% of surveyed economists are seeing the US economy going into recession in 2023. The drivers are the geopolitical tensions, increasing energy costs, rising inflationary expectations and wage pressures induced by tight labor markets.

But a recession is not inevitable. The world economy is still forecast to grow near 3% this year, a significant buffer to a slowdown. Consumers are in good shape, many still have lockdown savings, and companies are still doing well, growing profits. Sell offs create investment opportunities. Statistically the average bull market is over 4 times bigger, and lasts four times longer, than the average bear market. Economic slowdowns will eventually cut inflation and set up for more sustainable GDP and earnings growth in future. Lower stock market valuations now, set up for increases in the future.


Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.


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