Finimize - 👀 The ECB is debt serious

What’s going on here?

The Bank of England (BoE) held interest rates steady on Thursday for the seventh-straight time, but it hinted that a cut could happen as soon as August.

What does this mean?

The decision to keep borrowing costs at a 16-year record level didn’t shock many people. The BoE has said it wouldn’t rush to chip away at the high interest rates it’s been using to battle inflation. After all, they’ve proved pretty successful so far: data released on Wednesday showed consumer prices rising perfectly in line with the central bank’s 2% target in May, down from more than 11% in late 2022. But there were still signs of underlying pressures: core inflation, which excludes the more volatile stuff like food and energy, was way above target.

Why should I care?

For markets: Dark hours.

Everyone seems to have given up on the British market. Global investors aren’t wowed, US fund manager Invesco is folding its once-mighty UK stocks team, and London startup Zilch is contemplating an overseas shares debut in search of better liquidity, bigger excitement, and nicer incentives for high-growth firms. Just remember, it’s often darkest before dawn.

The bigger picture: Double-edged swords.

After a historic, aggressive spree of interest rate hikes, central banks are now pivoting toward rate cuts. Leading the pack is the Swiss National Bank, which unexpectedly unveiled a second trim on Thursday. And that suggests that, in some places, the battle against inflation is being won. Mind you, it also suggests that with price rises becoming less of a worry, policymakers may be turning their focus to economic weaknesses – like, say, the kind brought about by the dampening effects of a long stint of high interest rates.

What’s going on here?

The European Central Bank (ECB) has given a stern warning to its member countries about their heavy and growing piles of debt.

What does this mean?

The ECB is telling its members to start cutting back on their spending bloat now because the future’s not getting any cheaper. Europe’s aging populations are already reducing the number of folks in the workforce, just as defense and climate change costs ramp up. While all countries will have to slash expenses by at least 0.5%, some will have to dig much deeper and cut them by as much as 10%. And that will be a particularly tough shave for the likes of France and Italy: they’ve already been running budget shortfalls well beyond the European Commission’s agreed 3% limit. It’s no wonder, then, that worries have been growing about the 20-nation bloc’s finances – especially in France, where surprise snap elections have stirred market chaos.

Why should I care?

Zooming out: Less isn’t always more.

Dealing with the debt challenges could cost countries a stomach-churning 5% or more of their total economic output. Plus, the latest reprimand could stir up fresh fears about potential spending cuts and financial instability – the kinds of worries that could drive borrowing costs higher for places like France and Italy. Those nations will probably have to cinch their belts by trimming their expenses or hiking taxes, which could hurt businesses and consumers, ultimately squeezing profit and stock prices.

The bigger picture: A chill is in the air.

It seemed like 2024 was going to be a comeback year for initial public offerings (IPOs) in Europe. But investor jitters and new volatility in the bond and stock markets are giving companies cold feet: fearing a flop, Italian luxury brand Golden Goose chickened out of its Milan stock debut this week, and Spanish fashion maker Tendam Brands also turned tail. After raising about $13.3 billion in the first half of this year – more than double the same period in 2023 – it looks like Europe’s IPO scene might now be on ice.