The ECB’s rate decision on Thursday to keep rates steady after the first cut in June underscores that the global economy is now entering a new era, meaning investors must adapt to the evolving economic landscape.
This is the analysis of Nigel Green, CEO and Founder of deVere Group, one of the world’s largest independent financial advisory and asset management organisations, as the European Central Bank kept interest rates unchanged at 4.25% while indicating that its next move is still set to be a cut, but the forward guidance was vague and caveat-laden.
He says: “Our base case scenario remains that the ECB will implement its next rate cut in September.
“We expect that this will likely be followed by a series of gradual 25 basis point reductions each quarter, specifically in December, March, and June. This strategic pacing aims to support economic growth while managing inflationary pressures.
“The major factor contributing to the ECB’s cautious stance is sticky services prices. Services prices, in particular, are not falling in line with other sectors, thereby sustaining overall inflation levels.
“This persistence is, we believe, due to long-term contracts, wage agreements, and the slower transmission of economic policies to the service sector compared to goods.”
Nigel Green continues: “The ECB’s rate decision on Thursday underscores that the global economy is now entering a new era.
“Central banks are making the complex transition from the most intense interest-rate tightening cycle in recent decades to strategic and very gradual unwinding.
“This shift marks a pivotal moment for global markets and investors, who must adapt to the evolving economic landscape and its implications for investment strategies.”
We are currently experiencing divergent paths of major economies. The US Federal Reserve has yet to commence its rate cuts, maintaining a wait-and-see approach as it closely monitors economic indicators.
Meanwhile, The Bank of Canada has already begun its process of easing, highlighting the varying timelines and strategies across different economies.
This divergence underscores the unique economic conditions and challenges faced by each central bank, signalling a move away from the synchronised policy responses that characterised the peak of the tightening cycle.
“The unwinding of monetary policies heralds significant implications for global markets and investors. As central banks begin to lower rates, bond yields are expected to decrease, impacting fixed-income investments,” notes the deVere Group CEO.
"Equities will benefit from lower borrowing costs, potentially driving up stock prices. However, the pace and scale of these impacts will vary based on the specific trajectories of individual central banks and individual sectors.
Nigel Green concludes: “Diversification and adaptive strategies will be crucial in mitigating risk in the shifting landscape.
“Understanding the interplay between monetary policy and economic conditions will be vital for making informed investment decisions and seizing the inevitable opportunities from the new era.”
