Markets dial down expectations for interest rate rises but sticky inflation still a worry

A slew of corporate earnings results this week will reveal which economic sectors have been helped by higher rates to flourish and which have been hit. US banks including JP Morgan, Citigroup and Wells Fargo reaped windfalls from higher interest payments their first-quarter earnings reports stated on Friday. Upbeat earnings news from banks and large corporations may lessen the odds of rate cuts in the US later this year, Bruno Schneller, a managing director at Invico Asset Management, said.

While inflation has started to fall across the euro area, underlying price growth is proving stickier than expected and markets are pricing in a further 0.25 per cent hike in rates when the European Central Bank meets next month. ECB executive board member Isabel Schnabel, who has long said that inflation may be more persistent than estimated, said recently the fall in energy prices had been slow to improve medium-term prospects for inflation.

[ ECB’s Nagel says further to go on interest-rate hikes ]

Markets have dialled down their expectations for further interest rate hikes after the expected May increase, potentially easing the pressure on Irish mortgage holders, principally on the back of the ECB’s more benign inflationary outlook.

The ECB now sees inflation in the euro area averaging 5.3 per cent this year (down from 5.5 per cent previously), 2.9 per cent in 2024 and 2.1 per cent in 2025 “as the upward pressures from past supply shocks and the reopening of the economy fade out and as tighter monetary policy increasingly dampens demand”.

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Price data has been giving a mixed picture. While price pressures from the energy commodities and raw materials are easing, food-related costs and wage growth remains strong. Some analysts also believe that inflation might stall on its downward trajectory at a relatively elevated rate of 4 or 5 per cent, necessitating interest rates to remain higher for longer.

The speed of monetary tightening globally has exposed financial vulnerabilities, particularly in the banking sector, but the persistence of higher interest rates could expose us to more fundamental economic vulnerabilities. Higher borrowing costs will dampen consumption and investment, the main drivers of growth.