European stocks retreated and the euro lost value Monday after the president of the European Central Bank (ECB) warned of further interest rate hikes.
In a speech Monday, Christine Lagarde said that despite a drop in inflation rates in May across the European Union (EU), “underlying inflationary pressures remain high” and there is “no clear evidence that underlying inflation has peaked.”
Previously, there had been speculation that the ECB might lay off on rate hikes, as inflationary pressure in Europe appeared to be diminishing.
Lagarde’s remarks put the brakes on what had been a robust trading day on the major European stock exchanges.
The Frankfurt Stock Exchange in Germany, Europe’s largest economy, fell 1.1 percent in just 75 minutes after Lagarde’s comments. The Italian Stock Exchange in Milan fell by around the same amount, while in Paris the immediate fall was 1.3 percent.
Due to the late-day drops, all these exchanges finished the day in the red, despite a strong start to the session. Frankfurt’s blue-chip index closed trading at 0.54 percent below its opening level, while Milan was down by 0.78 percent, and Paris by 0.96 percent.
Other major exchanges also dropped after Lagarde’s remarks.
The London Stock Exchange, which is no longer in the EU, did not react so strongly to the comments, finishing the day about even with Friday’s close.
The euro currency was also hit by the news, losing around 0.6 percent of its value against the U.S. dollar, although the currency’s close was about even with its opening level for the day.
Stock markets and the euro currency rallied last week after the United States passed a deal to avoid defaulting on its debt, and as the members of the eurozone began releasing inflation data. After an increase in April, inflation was broadly lower in May.
Analysts said at the time that the lower inflation rates had given rise to the possibility that the ECB might delay the next hike in interest rates, a policy it adopted last year to help curb high inflation. Higher interest rates often act as a curb on investments, because they raise the cost of borrowing and lower the return on equity investments. ■