Weekly review 12 September 2022: How high can interest rates go?


What news did we get from the ECB’s meeting on Thursday? How high can interest rates go? What is the general market outlook right now? The weekly review answers these and other current questions about the markets.

What is the general market outlook right now?

Recently, the USA, Europe and the emerging markets have developed relatively uniformly. However, Europe has been weighed down by energy supply challenges. At the full-year level, the appreciation of the dollar against the euro has given the US equity market returns a slight boost compared to other markets. Last week, the equity markets were subdued, except for the stock price rally seen during the last days of the week.

Recently, the rise in interest rates has depressed returns on fixed income investments. Markets with plenty of interest rate risk, such as euro zone government bonds and lower-risk corporate bonds, fell the most. The decline in prices has, however, improved return expectations for fixed income investments, which is reflected in the rise in the return level. This year, the return level on European government bonds has risen to more than 2 per cent and to approx. 3 per cent in investment grade corporate bonds. In the USA, returns on government bonds have risen to more than 3 per cent and investment grade corporate bonds to around 5 per cent. As a result of rising interest rates, return expectations for new fixed income investments now appear very different than in recent years.

In higher risk investments, such as high yield corporate bonds and emerging market fixed income investments, credit spreads fell last week, which has had a positive impact on returns and compensated for the negative impact of rising interest rates.

What news did we get from the ECB’s meeting on Thursday?

One of the most anticipated events last week was the European Central Bank’s (ECB) interest rate meeting on Thursday.

At its meeting, the ECB raised its key interest rate by three quarter-points, i.e. 0.75 basis points, raising the key interest rate to 1.25 per cent. That is the single greatest interest rate hike in years. The hike corresponded with market expectations, nevertheless, and the markets did not experience any dramatic movements as a result of the meeting. Interest rates rose somewhat in Europe, and the euro appreciated against the dollar.

The inflation forecast for the whole of 2022 was raised to 8.1 per cent in the updated economic forecasts released in connection with the meeting, compared to the previous estimate of 6.8 per cent inflation.

This year the economy is forecast to grow another +3.1 per cent. The ECB reduced next year’s GDP growth forecast to +0.9 per cent. At the same time, the markets are expecting economic growth to fall into negative territory at least for a couple of quarters, i.e. to enter a downturn. In this environment, the ECB’s forecast appears optimistic.

How high can interest rates go?

At the press conference for the interest rate meeting, President Lagarde stressed that the ECB would continue on the rate hike path in order to curb inflation. The fixed income market is currently pricing in further interest rate hikes totalling five quarter-points, i.e. 1.25 per cent by the end of this year. Next year inflation is expected to stabilise in Europe to 5.5 per cent and to fall in 2024 to 2.3 per cent, which is fairly close to the ECB’s target. The interest rate hike cycle is predicted to continue into next year, but the hike pace will become much more moderate. The markets are pricing in hikes of 1–2 quarter-points, i.e. cumulatively 0.25–0.50 per cent more.

The next interest rate meeting of the United States’ central bank, the Fed, will take place next week on 21 September. The Fed is expected to raise its key interest rate to 3.25 per cent. For the entire remainder of the year, the markets are pricing in a further rate hike of some six quarter-points (i.e. 1.5 per cent), which would make the interest rate around 4 per cent at the end of the year. In the second half of next year, the Fed is expected to begin lowering its key interest rate.

What specifically should we keep an eye on this week?

On Tuesday of this week, the USA’s inflation figures will be released and on Friday the euro zone’s final inflation figures. In addition, Friday will see the release of the US consumer sentiment index calculated by the University of Michigan.

  • US inflation is expected to have fallen in August to 8 per cent, which could be explained by the drop in energy prices during last summer. Core inflation, which is inflation excluding changes in the price of energy and food, is expected to have accelerated to 6.1 per cent, however.
  • In the euro zone, inflation is expected to have accelerated to 9.1 per cent and core inflation to have been 4.3 per cent. The announcement is not expected to generate any major market movements as estimates based on preliminary data were released earlier.
  • US consumer confidence is expected to improve as energy prices fall and the labour markets develop strongly.


Nothing presented here is or should be taken as an investment recommendation or solicitation to subscribe for, buy or sell securities. When making investment decisions, the investor must carefully familiarise themselves with the information given on the financial instruments and understand the related risks. The investor must base their decision on their own assessment, goals and financial situation. Risk is always inherent in investment activities. The value of the investment instruments may increase or decrease. The past performance of investment instruments is no guarantee of future performance.

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