LONDON (AFP): European stock markets steadied and the pound dropped Wednesday as traders reacted to news of stubbornly-high UK inflation that risks pushing Britain into recession.
With annual inflation unchanged at 8.7 percent in May when markets expected a fall, the Bank of England (BoE) could react more aggressive than thought Thursday by hiking its key interest rate by a half point according to analysts.
“The impact of further monetary tightening on the British economy is likely to hinder economic activity and ultimately cause a contraction,” noted Ricardo Evangelista, senior analyst at ActivTrades.
Ahead of the BoE decision, investors were braced for testimony to Congress due Wednesday from US Federal Reserve boss Jerome Powell.
His comments will be closely scrutinised for clues about the direction of the Fed’s campaign to fight elevated inflation with interest-rate hikes.
The US central bank last week held rates steady after 10 straight increases, but signalled more hikes could come to bring prices under control.
The anxiety over Powell’s testimony built on top of disappointment across market floors this week with Beijing’s moves to try and revive the Chinese economy.
The People’s Bank of China reduced its benchmark five-year rate by 10 basis points on Tuesday, less than the 15 points expected.
Uncertainty over the Chinese economy, which continues to show signs of weakness as the post-Covid rebound fades, also weighed on the yuan, which on Wednesday briefly fell past 7.2 per dollar for the first time since November.
“Developments in China… continue to point to a slower-than-predicted post-pandemic recovery in the world’s second-largest economy,” added Evangelista.
“With China’s economy struggling to regain momentum, the headwinds for the global economy get stronger.”
The Shanghai stock market closed down 1.3 percent and Hong Kong lost two percent.