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Investors are confident of an interest rate cut by the European Central Bank next week and will be looking closely for any clues that it will lower rates again in October.
The ECB started lowering rates from their record high of 4 per cent in June but held off from making a second a cut at its July meeting, citing services inflation above 4 per cent as “a worry”. However, traders in swaps markets have now fully priced in a cut to 3.5 per cent at the bank’s meeting on Thursday.
Since the ECB last met, inflation has fallen sharply to a two-year low of 2.2 per cent in August, with Germany and Spain reporting larger than expected reductions. However, services inflation in the bloc ticked up to 4.2 per cent, although some economists put that down to the effect of the Paris Olympics.
“With the latest inflation data out of the Eurozone, a rate cut at next week’s European Central Bank meeting has almost become a done deal,” said Carsten Brzeski, global head of macro at ING.
“As current headline inflation is closing in on 2 per cent and longer-term inflation forecasts remain stable at around 2 per cent, the ECB has enough reasons to further reduce the level of monetary policy restrictiveness.”
ECB chief economist Philip Lane said last month that further rate reductions were likely, warning that keeping rates “too high for too long would deliver chronically below-target inflation over the medium term”.
Traders will scrutinise the announcement and the accompanying press conference for guidance on policymakers’ views on the longer-term inflation outlook. Markets are currently evenly split on whether the ECB’s third rate cut of the year will be delivered in October. Mary McDougall
Will US CPI offer a clear signal on the path for interest rates?
US inflation data will be closely scrutinised for indications about how far the Federal Reserve will choose to cut interest rates from their 23-year highs.
Payrolls data on Friday provided no clear signals as US employers added more jobs than in the previous month — at 142,000 versus a revised figure of just 89,000 for July. Following that data, market bets moved towards a quarter-point interest rate cut and away from a half-point cut, when policymakers next meet on September 18.
August’s consumer price index reading, due out on Wednesday, may offer greater clarity. The headline number is expected to land at 2.6 per cent, which would mark a decline from July’s reading of 2.9 per cent — the first time the headline number came in below 3 per cent since March 2021.
Core CPI, which excludes volatile food and energy prices, is forecast to remain at 3.2 per cent year-over-year, in line with the previous month’s reading. The monthly figure is estimated to come in at 0.2 per cent, according to polls by Reuters.
A softer-than-expected reading could push investors to up their bets on a bigger rate cut, while a pick-up in inflation would likely hamper any such expectations.
A 0.2 per cent month-on-month core CPI print “will give the Fed free range to do whatever they want”, said James Knightley, chief international economist at ING. He expects the central bank to lower rates by half a percentage point next month. Harriet Clarfelt and George Steer
How fast will UK wages rise?
Investors will closely monitor UK wage growth data next week to see if the pressure from earnings has receded enough to slow inflation growth.
Labour market data has sent mixed signals recently, with the unemployment rate falling in the three months to June — indicating a tightening labour market — but wage growth slowing, which signals easing pressures.
Because of the low response rate to the labour force survey, which provides the basis for the unemployment figures, economists and policymakers are likely to put more weight on the wage data, particularly for the private sector as this has a more direct link to inflation.
Investors will look for reassurances after the Bank of England’s Decision Maker Panel, a survey of chief financial officers from UK businesses, showed last week that companies’ wage growth expectations for the year ahead were stuck at 4.1 per cent in August, unchanged from the previous three months.
Investec economist Ellie Henderson expects more reassuring news from the Office for National Statistics data published on Tuesday. She forecasts regular pay growth to decline to 5.1 per cent in the three months to July after it dropped from 5.8 per cent to 5.4 per cent in the quarter to June. Regular private sector pay will slow to 4.9 per cent in the three months to July from 5.2 per cent in the previous period, she predicts.
The pay data will also be monitored for the impact on pensions, with the so-called triple lock pledge meaning state pension payments rise each year by either 2.5 per cent, inflation or wage growth — whichever is the highest. The figures on Tuesday will help determine the state pension uplift that will apply for the 2025-26 fiscal year.
Investors will also be watching GDP data for July released on Wednesday, to assess the strength of the economy and its possible impact on inflation. Economists polled by Reuters expect month-on-month economic growth to have risen to 0.2 per cent in July, up from zero in the previous month. Valentina Romei