Stocks drop as ECB and UK inflation puncture rate cut hopes

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Global stocks and bond markets retreated on Wednesday as investors scaled back expectations of swift interest rate cuts in the eurozone, the UK and the US.

The worldwide sell-off came after European Central Bank president Christine Lagarde signalled that borrowing costs would come down in summer rather than spring. It also followed the first rise in UK inflation in 10 months.

Lagarde said that market expectations for an ECB rate cut this spring were “not helping” the fight against inflation.

The region-wide Stoxx Europe 600 was down 1.5 per cent by mid-afternoon, while London’s FTSE 100 fell 1.6 per cent.

The losses spread to the US as strong retail sales data cast further doubt on the prospect of early cuts by the Federal Reserve.

The S&P 500 fell 0.7 per cent at the open on Wall Street.

Emerging market stocks, which are highly sensitive to interest rates in the developed world, also fell. An MSCI index of emerging market equities was down 1.6 per cent.

“It now seems that hopes for early cuts in rates from global central banks were a tad optimistic,” said Charles Hepworth, investment director at GAM Investments.

Asked if she agreed with fellow ECB governing council members who have signalled a rate cut is expected this summer, Lagarde said: “I would say it is likely too, but I have to be reserved.” 

She told Bloomberg TV at the World Economic Forum that the ECB would have information it required on wage pressures by “late spring”. Such data would be necessary before any decision to lower borrowing costs.

In the UK, the unexpected rise in inflation to 4 per cent prompted traders to scale back bets on Bank of England rate cuts.

December’s figure was the first rise in UK inflation since February 2023.

Matthew Landon, global market strategist at JPMorgan Private Bank, warned that the data would almost certainly delay a policy…