European stocks drop ahead of ECB policy meeting

European shares fell on Thursday ahead of a meeting of the bloc’s central bank, where it is expected to spell out its plans for monetary policy tightening to curb persistently high inflation.

The regional Stoxx 600 index lost 0.9 per cent in early dealings, with stock markets in the UK, Germany and France all slipping lower. Futures trading also implied a muted open on Wall Street later in the day, with contracts tracking the blue-chip S&P 500 share index broadly flat.

Following a meeting on Thursday, the European Central Bank is expected to set out plans to end its eight-year policy of negative interest rates following months of record-high inflation.

Meanwhile, US data on Friday are also expected to show the annual pace of consumer price rises in the world’s largest economy held at above 8 per cent in May, firming the Federal Reserve’s resolve to lift borrowing costs.

“Its quite a shift [in Europe] following years of low inflation,” said Juliette Cohen, strategist at CPR Asset Management. “We are now in a different world where the deflationary forces we’ve seen for years are no longer in place and we are in a new era where inflation will be higher for longer.”

Consumer prices have surged worldwide since industries reopened from coronavirus-related shutdowns and sanctions and supply chain disruptions caused by Russia’s invasion of Ukraine pushed up energy and food costs.

US and European government bonds have sold off heavily in anticipation of further inflation and rate rises, while the FTSE All World index of global stocks has lost almost 14 per cent so far this year.

The ECB, which has kept its main deposit rate at minus 0.5 per cent to stimulate lending and spending during the pandemic era, is expected to signal plans to pull borrowing costs back above zero by September.

Its asset purchase programme is expected to end in July. ECB policymakers are also believed to have discussed new mechanisms to safeguard weaker nations in the currency bloc, such as Italy, from higher debt costs.

“We expect [the ECB] to hike rates in July and at the next four meetings,” said Hetal Mehta, senior European economist at Legal & General Investment Management.

“They will probably also intervene verbally to give some comfort to markets,” about preventing any “disproportionate increase in borrowing costs for any one country, although it’s questionable whether they have a credible programme to do so.”

In Asia, a broad FTSE index of equities outside Japan fell 0.6 per cent, while the Nikkei 225 in Tokyo traded flat.

The yen touched a new 20-year low against the dollar of ¥134.55 before settling back to ¥133.6.

Traders are betting against the Japanese currency after Bank of Japan governor Haruhiko Kuroda vowed to support the economy with “powerful” monetary stimulus and, in claims he later withdrew, said consumers were “tolerant” of rising prices.

Government debt markets traded steadily, following price falls in the previous session. The 10-year US Treasury yield, which moves inversely to the price of the benchmark debt security, was flat at just over 3 per cent, reflecting money market bets of the Fed lifting its main interest rate above this level next year.

Germany’s 10-year Bund yield, which sets borrowing costs in the eurozone, was also flat at 1.34 per cent, around its highest since 2014.

The euro was flat against the dollar, at just over $1.07. Brent crude, the oil benchmark, edged 0.4 per cent lower to $123.2 a barrel, having advanced more than 50 per cent so far this year.

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