Will the ECB raise rates again?

For the first time in more than a year, the European Central Bank’s decision on whether or not to raise interest rates at its meeting on Thursday rests on a knife’s edge.

Having already raised its key deposit rate by minus 0.5 percent last summer to 3.75 percent to deal with the biggest surge in inflation in a generation, the ECB now appears to be closing in on the high point of its political tightening.

Investor doubts over whether the central bank will raise interest rates for the 10th consecutive time have intensified amid widespread signs of a looming economic slowdown, including a loss of business confidence and a decline in output German industrialist.

The ECB will also release new quarterly forecasts after its meeting on Thursday, which most economists expect to include a weaker growth outlook and a slight increase in its inflation expectations for this year and next year. next.

1. “As forward-looking growth data has been identified as having been disappointing of late, we believe this will be enough to justify maintaining the status quo next week,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.

Derivatives markets price around a 35 percent chance that the ECB will raise its deposit rate to 4 percent on September 14.

However, with euro zone inflation of 5.3 percent in August still well above the ECB’s 2 percent target, many economists believe another – and almost certainly the last – rate hike is still possible.

“It’s a very close decision, but inflation still too high, a focus on actual developments rather than predicted developments, and fear of a premature end will tip the scales towards an eventual rate hike,” he said. said Carsten Brzeski, Global Head of Macro Research. at ING. Martin Arnold

Did US inflation accelerate in August?

Headline inflation in the United States is expected to have jumped in August, with core inflation slowing nonetheless, which could increase pressure on the Federal Reserve to keep interest rates higher for longer.

The Bureau of Labor Statistics releases the latest inflation data on Wednesday, with economists surveyed by Bloomberg forecasting an annual rate of 3.6 percent. This would mark an increase in the overall figure from 3.2 percent in July, and the highest level since May.

The acceleration is expected to be partly driven by rising energy prices, Barclays analysts say, with core inflation – which excludes the volatile food and energy sectors – expected to have slowed to 4.3 percent in August, compared to 4.7 percent in July. The monthly base rate is expected to remain stable at 0.2 percent.

The acceleration in the headline annual figure is also attributable to less favorable base effects: headline inflation peaked in June last year, and the annual rates for June and July this year reflected a change from previous very high figures from the middle of the year. last summer.

1. Barclays analysts say a CPI release in line with their expectations – 3.7 per cent headline and 4.3 per cent core – would align with a further 0.25 percentage point increase in rates. interest on the part of the Fed. Futures market positioning suggests that investors more broadly do not expect the Fed to raise interest rates at its September meeting and see a roughly 50 percent chance that ‘a further increase is achieved by November. Kate Duguid

Will UK wage growth slow?

Investors will be closely scrutinizing UK labor market data after Bank of England Governor Andrew Bailey signaled this week that the central bank may not raise rates again, despite market expectations of two more rate increases. 0.25 percentage points.

Economists polled by Reuters expect annual wage growth to have returned to 7.6 percent, which would give the Bank of England some breathing space after last month’s figures showed growth annual salary figures excluding bonuses had reached a record level in the three months preceding June. 7.8 percent.

The Bank of England’s Monetary Policy Committee is closely monitoring wage growth for signs of continued price pressures and monitoring overall labor market tensions.

Speaking to the Treasury select committee on Wednesday, Bailey acknowledged that pay increases so far had been faster than the committee had anticipated, but added that this could soon change.

Markets are currently pricing in an 80 percent chance that the Bank of England will raise rates by 0.25 percentage points on September 21, to 5.5 percent. If the wage data is weak, analysts say that would make another rate hike less likely. Mary McDougall

Summary:

The European Central Bank’s decision on whether or not to raise interest rates is highly uncertain as the bank grapples with a potential economic slowdown and elevated inflation. With the possibility of weaker growth outlook and a slight increase in inflation expectations, many economists expect the ECB to maintain the status quo for now. Meanwhile, in the United States, inflation is projected to have accelerated in August, putting pressure on the Federal Reserve to prolong higher interest rates. However, core inflation is expected to have slowed, indicating a complex outlook for the central bank. In the United Kingdom, investors are closely watching wage growth data, as the Bank of England signals hesitation in raising rates further. If wage growth slows, it could affect the likelihood of another rate hike. These developments in major central banks’ policies have significant implications for the global economy.

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