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Central banks expected to raise interest rates to 15-year highs this week
European stock markets are expected to open lower, as investors brace for central bank decisions in the UK, eurozone and the US later this week.
These major central banks are expected to raise interest rates to their highest levels since the financial crisis, which could further slow the global economy, as they battle the highest inflation rates seen in decades.
The Bank of England is expected to raise UK interest rates on Thursday, from 3.5% to probably 4%, which would be the highest since autumn 2008. The BoE may also upgrade its growth forecasts.
The European Central Bank is also expected to hike borrowing costs by 50 basis point (half a percent).
The US Federal Reserve makes its decision the night before, and could slow its tightening programme – perhaps lifting US interest rates by another quarter-point.
Stock markets have rallied in recent weeks, lifted by signs that price pressures are easing, and hopes that China’s easing of Covid-19 restrictions may lift the global economy.
Many investors are optimistic that central banks will ease off on interest rate increases, after sharp rises through 2022, as Michael Hewson of CMC Markets explains:
Last week’s sudden surge of exuberance from US markets appears to be being driven by a belief that not only will the US economy avoid a hard landing, but that the Federal Reserve will not only signal another step down in its rate hiking cycle to 25bps but will also signal a pause.
This belief that we could see a pause in the Fed’s rate hiking cycle was given legs last week, when the Bank of Canada signalled that it was doing exactly that to further assess the impact of recent rate hikes on the wider economy.
But, central bankers could spoil the party this week – if they push back against those expectations.
Hewson says:
The strong start to 2023 appears to have given way to a little bit of caution for markets in Europe as we look to this week’s trifecta of central bank meetings, and what sort of outlook is painted by the Federal Reserve, ECB and Bank of England, and more importantly how many more rate hikes can we expect to see after next week.
This caution looks set to translate into a lower open for markets in Europe this morning ahead of Q4 German GDP numbers which are expected to show the economy in Germany ground to a halt.
The UK’s FTSE 100 is expected to drop around 50 points at the open, or 0.6%, to 7717, the futures market suggests.
Airline bankruptcies ‘create growth opportunities’ for Ryanair
Ryanair says it grew its market share in several key EU markets during the last quarter.
Most notable gains, it says, were in Italy (from 26% to 40%), Poland (27% to 38%), Ireland (49% to 58%) and Spain (21% to 23%).
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Overall, Ryanair operated at 12% above its pre-Covid capacity over the last nine months.
Chief Executive Officer Michael O’Leary said in a statement that demand is strong:
With Asian tourists now returning and a strong US dollar encouraging Americans to explore Europe, we’re seeing robust demand for Easter and summer 2023 flights.
Turmoil in the airline industry is an opportunity for Ryanair to keep growing, O’Leary adds:
Over the past 3 years, numerous airlines went bankrupt and many legacy carriers (incl. Alitalia, TAP, SAS and LOT) significantly cut their fleets and passenger capacity, while racking up multi-billion-euro State Aid packages.
These structural capacity reductions have created enormous growth opportunities for Ryanair.
Introduction: ‘Pent-up travel demand’ lifts Ryanair profits
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Strong trading over Christmas and the New Year have helped budget airline Ryanair to triple its profits in the last quarter, compared with pre-Covid levels.
Just two days after UK regional airline Flybe ceased trading and cancelled all its scheduled flights, Ryanair has reported that its profits jumped in the last three months of 2022
Ryanair says “strong pent-up travel demand” over the October half-term holiday and the Christmas/New Year holiday season had stimulated strong traffic and fares across all markets, with “no adverse impact from Covid or the war in Ukraine”.
It has reported a profit-after-tax of €211m in October-December 2022, compared to €88m in the same quarter pre-Covid. A year ago, it made a €96m loss in the quarter, when pandemix restrictions and the Omicron variant hit demand.
During the quarter, traffic jumped 24% to 38.4m passengers – 7% higher than pre-Covid levels, while fares were 14% higher than before the pandemic.
Ryanair expects the current quarter to be loss-making, as Easter falls in April this year. But it is sticking with its recently upgraded forecast of an after-tax profit of between €1.325bn and €1.425bn for the full year to the end of March.
Chief financial officer Neil Sorahan says demand is strong, telling Reuters that:
Bookings are showing no signs of recession at this point in time,”
“We had record bookings in week two and week three of January, very robust demand into Easter and the summer without fare stimulation.
The agenda
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9am GMT: German Q4 2022 GDP report
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10am GMT: Eurozone consumer and business confidence report for January
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3.30pm GMT: Dallas Fed index of US manufacturing for January
