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Will the ECB deliver one more rate rise?
For the first time in more than a year, the European Central Bank’s decision of whether to raise interest rates at its meeting on Thursday is resting on a knife-edge.
Having already raised its benchmark deposit rate from minus 0.5 per cent last summer to 3.75 per cent as it tackled the biggest surge in inflation for a generation, the ECB now seems to be approaching the peak of its policy tightening.
Investors’ doubts over whether the central bank will raise interest rates for the 10th consecutive time have intensified amid widespread signs of an impending economic downturn, including weaker business confidence and falling German industrial production.
The ECB will also publish new quarterly forecasts after its meeting on Thursday, which most economists expect to include a weaker outlook for growth and a slight increase to its inflation expectations for this year and next year.
“As forward looking growth data has been identified as having disappointed lately, we expect this to be sufficient to justify staying on hold next week,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.
Derivatives markets are pricing about a 35 per cent chance of the ECB raising its deposit rate to 4 per cent on September 14.
However, with eurozone inflation of 5.3 per cent in August still running well above the ECB’s 2 per cent target, there are many economists who believe another — and almost certainly final — rate rise is still possible.
“It is a very close call, but still too high inflation, a focus on actual rather than on predicted developments, and the fear of stopping prematurely will tilt the balance towards a final rate hike,” said Carsten Brzeski, global head of macro research at ING. Martin Arnold
Did US inflation accelerate in August?
US headline inflation is expected to have jumped in August, with core inflation nevertheless slowing, which could add to the pressure on the Federal Reserve to keep interest rates higher for longer.
The Bureau of Labor Statistics on Wednesday releases the latest inflation data, with economists polled by Bloomberg forecasting a year-on-year rate of 3.6 per cent. That would mark an increase in the headline figure from 3.2 per cent in July, and the highest level since May.
The acceleration is expected to be in part due to higher energy prices, Barclays analysts argue, with core inflation — which strips out the volatile food and energy sectors — expected to have slowed to 4.3 per cent in August, from 4.7 per cent in July. The core monthly rate is expected to be steady at 0.2 per cent.
The acceleration in the headline yearly figure is also attributable to less favourable base effects — headline inflation peaked in June last year, and the year-over-year rates for June and July this year reflected a change from the very strong numbers in the middle of last summer.
Barclays analysts argue that a CPI release in line with their expectations — 3.7 per cent headline and 4.3 per cent core — would align with another 0.25 percentage point increase in interest rates from the Fed. Positioning in the futures market suggests that investors more broadly do not expect the Fed to raise interest rates at the bank’s September meeting and see a roughly 50 per cent chance of another increase by November. Kate Duguid
Will UK wage growth ease?
Investors will scrutinise UK labour market data after Bank of England governor Andrew Bailey this week signalled the central bank may not deliver any more rate rises, despite market expectations of two more 0.25 percentage point increases.
Economists polled by Reuters expect annual pay growth to have eased to 7.6 per cent, which would provide the Bank of England with some breathing space after figures last month showed that annual pay growth excluding bonuses had hit a record high in the three months to June at 7.8 per cent.
The Bank of England’s Monetary Policy Committee watches wages growth closely for signs of persistent price pressures, and monitors the overall tightness of the labour market.
Speaking to the Treasury select committee on Wednesday Bailey acknowledged that so far wage rises had been faster than the committee had anticipated but added this might soon change.
Markets are currently pricing in an 80 per cent probability that the Bank of England will deliver a 0.25 percentage point rate increase on September 21 to 5.5 per cent. If wages data are weak, analysts say that would make a further rate increase less likely. Mary McDougall
