European markets mostly drop before ECB

Europe's stocks mostly fell Thursday before an expected European Central Bank interest rate increase, and after the US Federal Reserve paused its rate-hiking cycle but signaled more to come.

Frankfurt and Paris equities sank in early afternoon deals while London flatlined after a mixed performance in Asia.

The euro held firm against the dollar as dealers awaited news from the ECB.

Despite recession in the eurozone, the institution is tipped to deliver a quarter-point hike to tackle high inflation, which has largely been caused by soaring energy prices after key producer Russia's invasion of Ukraine.

Inflation in the bloc slowed to 6.1 percent in May year-on-year, but remains more than three times the ECB's two-percent target.

Central banks hike rates in a bid to dampen inflation, but this also hurts economic activity, ramps up loan repayments and weighs on investor sentiment.

"Central banks remain... hawkish" owing to stubbornly-high inflation, OANDA analyst Craig Erlam told AFP.

"The Fed paused but forecast two more rate hikes, while the ECB will likely push back against the idea of a pause at this point after hiking today."

Policymakers remain on alert over simmering inflation, with Canada and Australia recently springing surprise rate hikes.

This "highlights just how concerned central banks remain about the potential of above target inflation becoming embedded", cautioned Erlam.

Fed policymakers opted Wednesday to freeze borrowing costs, having implemented 10 straight hikes since early 2022.

However, they signaled more increases were likely later in the year as inflation was still double the bank's target rate and the jobs market remained tight.

The move to hold rates at 5.0-5.25 percent came a day after figures showed prices rose 4.0 percent last month on an annual comparison, the slowest pace since March 2021.

The reading added to hopes the Fed could guide the economy to a soft landing and eased worries the United States could tip into recession.

"The Fed left rates on hold but the accompanying guidance was more hawkish than expected," said MUFG analyst Lee Hardman.

"It was still the first time that the Fed decided not to raise rates... since the current tightening cycle began back in March of last year."

In contrast, investors also digested news that China's central bank had cut a key interest rate in a bid to boost activity in the struggling Asian powerhouse economy.

The Fed news got a mixed reception on Wall Street on Wednesday, with the Dow finishing lower but the S&P 500 and Nasdaq rising modestly.

Elsewhere Thursday, Europe's reference gas price hit a two-month high on falling supplies from major producer Norway, which has suffered pipe leaks and maintenance shutdowns.

Norway has become Europe's biggest gas supplier in the wake of Russia's war on neighboring Ukraine.



AFP