The European Central Bank is likely to cut interest rates next year, which could have far-reaching consequences for investors worldwide, predicts the CEO of one of the world’s largest independent financial advisory asset management and fintech organizations.
Nigel Green of deVere Group’s comments come as ECB Board member, Isabel Schnabel, who has previously been one of the most hawkish of the Board, told Reuters on Tuesday that given a “remarkable” fall in inflation, the central bank can now take rate hikes off the table.
Euro zone inflation fell to 2.4% last month, down from above 10% a year earlier.
He comments: “When the hawks turn dovish, and as inflation falls to within touching distance, it is reasonable to assume that the ECB will start to cut rates.
“We now expect this to begin in the first quarter of 2024.”
If the ECB decides to cut interest rates, European investors are likely to experience both challenges and opportunities.
“On the one hand, lower interest rates can boost economic growth, leading to increased corporate profits and potentially higher stock prices.
“However, on the downside, savers and bond investors could face diminished returns. The repercussions of ECB interest rate cuts extend beyond Europe, influencing global bond markets.
“As the ECB lowers rates, it can be expected to trigger a broader trend of falling yields in bond markets worldwide.
“Fixed-income investors across the globe, seeking higher returns, may shift their attention to riskier assets.”
Another channel through which the ECB’s policy decisions affect global investors is currency markets. A rate cut by the ECB is likely to lead to a depreciation of the euro against other major currencies.
This can impact international investors holding euro-denominated assets, either positively or negatively, depending on their exposure and hedging strategies. For instance, European exporters may benefit from a weaker euro as it makes their goods more competitive in global markets.
Equity markets around the world are, of course, closely interconnected, and changes in one major economy can have ripple effects globally.
“A rate cut by the ECB could be expected to inject liquidity into financial markets, leading to a surge in equity prices. International investors could find opportunities for capital appreciation, especially in sectors that are sensitive to interest rates, such as real estate and utilities.”
Nigel Green concludes: “We now expect that the ECB could be among the first of the major central banks to start cutting interest rates in the first quarter of 2024.
“Investors across the globe will be closely monitoring developments and potentially adjusting their strategies to adapt to the evolving economic landscape.”