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European markets slip ahead of ECB interest rate decision

European stocks edged lower at the open on Thursday as global investors digested contrasting policy decisions from some of the world’s most influential central banks.

The benchmark Stoxx Europe 600 fell 0.2 per cent, easing after three consecutive days of gains ahead of the European Central Bank meeting to set interest rates for the eurozone.

Stocks rallied in Asia after the People’s Bank of China cut its medium-term policy rate in the face of slowing economic growth. Overnight on Wall Street, the benchmark S&P 500 finished 0.1 per cent higher in a choppy session after the Federal Reserve held interest rates steady following 10 consecutive increases.

Traders expect the ECB will increase its deposit rate by 0.25 percentage points to 3.5 per cent, its highest since July 2001, to tame stubborn inflation.

“If that is the outcome, this means that if the ECB wants to land a hawkish message, it has to do so via its communication on where it sees policies heading further after today”, said Antoine Bouvet, head of European rates strategy at ING.

Markets are less certain about how much higher borrowing costs will go in the 20-country zone, and one of the signals on future policy will be whether the central bank lowers its inflation forecast, also due on Thursday.

In Asia, the Hang Seng China Enterprises index, which tracks mainland Chinese companies listed in Hong Kong, rose 2 per cent and the CSI 300 of Shanghai- and Shenzhen-listed stocks gained 1.6 per cent.

The gains came after the PBoC lowered its medium-term lending facility rate by 0.1 percentage point to 2.65 per cent, having cut its seven-day lending rate earlier in the week by the same amount, which was its first move to boost short-term liquidity in the country’s interbank market in nine months.

Data released alongside the announcement underscored the slowing pace of China’s economic recovery. Growth in industrial output and retail sales fell short of economists’ expectations, while the pace of contraction in property investment and sales also worsened in May.

Analysts were sceptical that the cut to the medium-term rate, which serves as the floor for China’s benchmark prime loan rate, would be enough to get growth back on track.

“The underlying story on the economy is extremely disappointing right now,” said Robert Carnell, head of Asia-Pacific research at ING. He said the renminbi could weaken to Rmb7.2 against the dollar “in days” and that policymakers would regard a weaker currency “as one of the policy tools they will need to lean on to help the economy”.

The moves come a day after the US central bank announced a widely-anticipated decision to keep the federal funds rate steady, maintaining its target range of between 5 per cent to 5.25 per cent. 

The meeting marked the first pause in more than 14 months of the Fed’s aggressive tightening campaign aimed at bringing down persistently high inflation.

The dollar, which strengthens when investors expect higher rates, gained 0.4 per cent against a basket of six peer currencies.

In government debt markets, the policy-sensitive two-year Treasury yield added 0.04 percentage points to 4.74 per cent. The yield on the benchmark 10-year note gained 0.03 percentage points to 3.83 per cent. Bond yields fall as prices rise. 

Contracts tracking Wall Street’s benchmark S&P 500 slipped 0.1 per cent and those tracking the tech-heavy Nasdaq 100 lost 0.2 per cent ahead of the New York open. 

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