The Federal Reserve and the European Central Bank will continue to hike their interest rates this month among broad and persistent signs of strong consumption and the “resilient nature” of economic activity, Guy Wagner, chief investment officer at BLI - Banque de Luxembourg Investments, said.
Domestic consumption in the US appears to have accelerated in the first quarter, supported by a buoyant labour market, robust wage growth and a savings surplus that has yet to be exhausted, Wagner noted. The increase in layoffs in sectors that benefited from the pandemic is still more than offset by the creation of new jobs in service activities.
“In Europe, even the industrial sector is showing signs of improvement, with lower oil and gas prices allowing companies to regain control of their production costs,” Wagner said in a note to investors. “In China, the end of the zero-covid policy and the reopening of the economy are generating an economic recovery that looks promising, with purchasing managers’ indices showing a strong rebound.”
Given the resilient nature of economic activity and recent mixed inflation numbers, the US Federal Reserve may have to increase the final level of the target range for the federal funds rate at its 22 March meeting. However, the pace of rate hikes in 25 basis point increments does not appear to be in question. “In Europe, a further 0.5% interest rate hike in March seems almost certain,” Wagner said.
The European Central Bank’s next policy meeting is scheduled for Thursday 16 March.