The G7’s hawk ECB may raise rates again this week
The European Central Bank is poised to implement a second interest-rate hike in the upcoming week, shifting attention to the extent of officials’ willingness to consider a third increase later in the year. In a development poised to solidify the ECB’s position as the most hawkish central bank within the Group of Seven, a quarter-point increase on Thursday has been broadly indicated, implying that discussions are already transitioning toward the necessity for an additional hike. Recently returned from an extended summer break and equipped with updated quarterly projections, policymakers in a region that remains significantly reliant on energy imports are facing the ongoing challenges posed by hostilities in West Asia, alongside a resurgence in fuel prices. Recent data indicated that euro-zone inflation surged in August to 3.3%, marking the quickest rate in nearly three years and significantly exceeding the 2% target. In contrast to the US Federal Reserve, which maintains a relatively sanguine perspective on inflation that may soon be challenged by upcoming consumer-price data, the ECB has clearly articulated the necessity for pre-emptive tightening. Evidence of resilient growth may reinforce that perspective.
Recent euro-zone inflation data provided a degree of reassurance, as there was an unanticipated deceleration in the core measure. However, officials appear disinclined to take risks, particularly following the backlash regarding their sluggish response to the 2022 cost-of-living crisis. The discussion surrounding a potential third increase appears to be delicately poised. Gediminas Simkus, the governor of Lithuania’s central bank, expressed the view that a rate hike in September may not suffice, while Bundesbank chief Joachim Nagel remained cautious in providing any indications. Investors are predominantly factoring in a rate increase for December, despite the consensus among many economists indicating that the tightening measures implemented on Thursday will be the final ones for the time being. That consensus is exhibiting indications of alteration, as analysts at JPMorgan, Societe Generale, and BNP Paribas have recently revised their forecasts to anticipate such a move.
United States and Canada
The argument for an interest-rate increase during the Fed’s meeting on September 15-16 may depend on forthcoming government inflation statistics, following the recent monthly jobs report that indicated widespread robustness in the labour market. Economists anticipate that the consumer price index increased by 0.4% in August, marking an acceleration compared to the previous month, attributed in part to rising petrol prices. Excluding the more volatile energy and food sectors, the core CPI is anticipated to have increased by a more subdued 0.2%, as indicated by the median of the survey in advance of Friday’s report. That would assist in reducing the annual measure of core inflation to 2.4%, marking the lowest year-over-year rise since 2021. On Thursday, the Bureau of Labour Statistics will release the producer price index. Expectations among economists indicate that both the PPI and a core measure are likely to show acceleration in August. Those figures are anticipated to reflect the more immediate price effects stemming from the Iran conflict and associated supply-chain disruptions. The same day, a report from the National Association of Realtors is anticipated to indicate a third consecutive month of decreasing sales of previously-owned homes. The housing market is facing significant challenges due to high mortgage rates, elevated prices, and a relatively limited supply. Further north, attention will center on trade relations as Canada’s counter-tariffs on the US come into effect on Tuesday. The significant inquiry is whether President Donald Trump will implement further measures, thereby initiating a new cycle of escalation. There is currently no indication of a resumption of negotiations.
Asia
A focus in Asia will be on inflation indicators in China. Consumer price gains are anticipated to have accelerated to 0.9% year-on-year in August, following the slowest pace in six months recorded in July. Concurrently, factory-gate inflation is projected to rise to 3.7%, which would indicate a positive sign for demand. Thailand and Taiwan are set to publish their inflation reports. On Tuesday, Japan is expected to adjust its second-quarter GDP upward slightly, following the incorporation of capital investment figures for the period that surpassed forecasts. Japan is set to release its July wage data, which will provide insights into the outlook for consumer spending. There will be a particular focus on real wages, especially following the significant revision in June that indicated the largest increase in five years. On the same day, Australia releases its September consumer sentiment and August business confidence gauges, with the latter reading remaining in negative territory for six consecutive months.
On Monday, Singapore will release its retail sales data for July, while China and Taiwan are among the countries set to publish trade data in the upcoming week. New Zealand is set to release its manufacturing activity data for the second quarter on Tuesday, followed by the publication of its manufacturing PMI for August later in the week. That gauge has remained in inexpansionary territory for 13 months. There are no central bank decisions in Asia this week; however, multiple officials are scheduled to engage in speaking events. Bank of Japan board member Kazuyuki Masu is set to address business leaders on Thursday, marking the last planned engagement by a BOJ official prior to the anticipated increase in the benchmark rate on September 18. Masu will be scrutinised to determine whether he affirms or contests the dominant market expectations. Additionally, RBA Assistant Governor Sarah Hunter, RBA Deputy Governor Andrew Hauser, and RBNZ Assistant Governor Karen Silk will be present.
Europe, the Middle East, and Africa
Initial indicators of economic growth in the third quarter will be scrutinised throughout Europe. In Germany, the figures for industrial production will be released on Monday, followed by export numbers on Tuesday for the month of July. The releases could contribute to the accumulating evidence of a sustained recovery in Europe’s largest economy, following another significant increase in factory orders observed in the data released on Friday. Meanwhile, France, which narrowly avoided a recession in the first half, is set to release industrial production data for July on Wednesday. Euro-zone numbers on Monday will provide a revised evaluation of growth in the region for the quarter ending in June, which was initially projected at 0.4%. UK gross domestic product figures for July will be released on Friday, providing the initial data for both the current quarter and the early period of Prime Minister Andy Burnham’s administration. The Bank of England’s inflation attitudes survey is set to be released on the same day. Ahead of that, BOE Governor Andrew Bailey and colleagues will appear on Tuesday before the UK Parliament’s Treasury Committee to discuss monetary policy. Turning to the Nordics, consumer-price data will provide essential insights for policymakers. Sweden’s preliminary inflation reading for August, scheduled for release on Monday, will attract significant attention as the central bank deliberates on the necessity of raising interest rates this autumn.
Governor Erik Thedeen stated last month that the Riksbank’s forthcoming policy adjustment “needs to be a rise,” although the timing is still uncertain as economic growth accelerates concurrently with inflationary risks associated with the Iran conflict seemingly diminishing at that time. Inflation data from Norway is expected to indicate that core price growth has rebounded above 3%, following an unexpected decline below that threshold in the preceding two months. A more benign reading would enhance the likelihood that the Norges Bank delays the tightening expected this month, potentially opting for action later in the year. Further afield, South Africa’s data on Tuesday are anticipated to reveal a contraction of 0.1% in the economy for the three months ending in June, marking the end of six consecutive quarters of growth. This downturn is attributed to the ongoing conflict in Iran and heightened uncertainty in advance of local government elections, which have adversely impacted investment. Additionally, both mining and manufacturing output have experienced a decline.
On Wednesday, Poland’s central bank is poised to maintain borrowing costs for the sixth consecutive month, as the inflation outlook remains obscured by the conflict in Iran, while the economy continues to advance robustly. Serbia’s central bank is poised to maintain its rate pause for an unprecedented duration of two years on Thursday, sustaining its benchmark at 5.75%. This decision comes in light of stronger-than-anticipated economic growth, although inflation, which appears to be under control, remains vulnerable to fluctuations in energy prices. Denmark’s central bank does not have scheduled decisions; however, it typically follows the lead of the ECB. Therefore, it is probable that policymakers will increase borrowing costs by a quarter point on Thursday. On Thursday, Turkey’s central bank is anticipated to maintain its rate at 37%, cautious of a spike in oil prices and increased tensions in West Asia. There exists a remote possibility of a 100-basis-point reduction, considering the current economic slowdown and the easing of inflationary pressures. On Friday, Russian officials are expected to deliberate on whether to maintain the current borrowing costs or implement a modest reduction, marking their first meeting since July. That’s as last month’s inflation, reported on the same day, likely accelerated. Latin America The upcoming week presents August inflation reports from five of Latin America’s six major economies, with Brazil taking center stage. The headline print in Latin America’s leading economy is anticipated to have decreased to below 4.3% from 4.44% in July, falling just short of the 4.5% upper limit of the central bank’s target range. However, a rebound is expected in September.
Given that data, along with unmistakable signs that growth is downshifting, more than a few observers of Brazil anticipate the central bank may implement a fifth consecutive quarter-point reduction later this month, bringing the rate to 13.75%. Next up is Chile, where President José Antonio Kast’s ambitious growth agenda has encountered a series of challenges. The preliminary assessment of August consumer prices indicates a modest increase, approaching the 4% upper limit of the central bank’s target range, up from 3.5% in July. Chile’s central bank is expected to maintain its interest rate at 4.5% for the sixth consecutive meeting on Tuesday. The bank’s quarterly monetary policy report is expected to revise downward its projections for output and inflation. In Mexico, the inflation data for August could signify the conclusion of a captivating four-month period of disinflation, during which consumer prices reached a six-year low of 3.12% in July. Peruvian central bankers convening on Thursday have compelling reasons to consider a modest increase from 4.25%, following August’s inflation rate, which exceeded expectations at 4.44%. However, a number of analysts anticipate that the decision will result in a 12th consecutive hold. Argentina’s monthly inflation has been approximately 2% over the last three months, with local economists predicting only slight deceleration as the year concludes. The monthly and year-on-year readings likely decreased due to favourable seasonality and a stable exchange rate. In Colombia, the preliminary consensus indicates that both the headline and core readings have experienced another slight increase, rising from 6.03% and 6.07% respectively.
