Another hike before the ratification of the nearer end to higher interest rates. The Fed and the European Central Bank hold monetary policy meetings this week and the money rate is expected to rise for both: to a range of 5.25% -5.5% in the US and 4.25% in the Eurozone. This will be an occasion to see if, as the market expects, it will be the end of the interest rate hike by the Federal Reserve and also the last, or penultimate, of the bank headed by Christine Lagarde.
The US rate hike coming out of this Wednesday’s Fed meeting is a foregone conclusion. In last month’s quote, Jerome Powell stopped – for the first time in over a year – And he left the price of money unchanged, although he also warned that this does not mean achieving the goal of curbing inflation. He then advanced that there were still two more price hikes for the remainder of the year, a message that the market did not accept at the time and much less do now, in light of the latest US economy indicators.
The release of US CPI data for June a few days ago was somewhat of a turning point. It promoted the idea that higher interest rates eventually dampen inflation and that it would not be necessary to cause a recession to achieve the goal of price stability. US inflation fell 1 point in June to 3%While the base rate fell by five-tenths to 4.8%. Meanwhile, the country grew by 2.3% in the second quarter, with unemployment falling in June to 3.56%. “Recent data has strengthened our confidence that a recession will not be necessary to bring inflation down to an acceptable level,” they defended at Goldman Sachs. The US Bank has just lowered the probability it gives of a recession starting in the coming months from 25% to 20% and expects the Fed’s expected rate hike this week to be the last.
A recent Reuters poll of more than 100 economists insisted that this week’s interest rate hike in the US would be the last. A cut in the money rate is already expected in 2024: rates may be higher for longer than expected. Although the market continues to challenge the Fed by signaling the first cut in the first quarter of next year, Goldman Sachs’ cut is delaying the second. “The impact of the price rise, which was the fastest in 40 years, may take another 6-12 months to fully appreciate. However, we have already seen a series of threats to the financial system, with three of the four largest bank failures in US history. As a result of the current significant drop in inflation, a soft landing scenario becomes more likely,” argues Greg Meyer, chief economist at Allianz GI.
Regarding the Eurozone, there is no doubt about another 25 basis point rate hike next Thursday. Although everything is uncertain about the September date, it will depend more than ever on what data becomes known. The summer return stage is wide open, It also acknowledges hawks in the European Central Bank’s Governing Council. Dutch central bank governor Klas Nott, the hawkish ECB leader, said last week that core inflation appeared to have “stabilized” and that additional measures after July were “possible, but by no means certain”.
Inflation will inevitably remain at the center of the debate and last week’s June data will not reinforce expectations that this week’s rate hike may be the last.. Eurozone CPI in June fell to 5.5% From 6.1% in May. However, the core rate rose to 5.5%, a tenth more than expected and further from the previous month. Ruben Segura Kaiwela, chief economist at Bank of America for Europe, does not expect surprises at the July meeting or for the ECB to provide clear guidance. “If they were not ready in June, they are unlikely to be ready now, given the absence of any hard news either way. With the central bank giving disproportionate weight to core inflation in its decisions, developments in data since the June meeting are unlikely to provide a clear incentive to overcome internal disagreement about what needs to be done further; the decision is then left completely open-ended,” he explains.
Without economic indicators that give a clear idea of the level of inflation after the summer, the gap between north and south in inflation rates has become more evident in the eurozone. Spain is already close to the rate level that the European Central Bank aspires to, while it suffers greatly from raising interest rates due to its high debt, and France and Portugal are below average for euro countries, which increases political pressure against higher rates.
The Federal Reserve is at the forefront of the end of the monetary cycle
fight inflation. Most of the other G10 central banks are still some way from completing their tightening cycles from the Fed. The Bank of England will meet on August 3 and another rate hike is expected, although recent inflation data has given some relief, dropping from 8% to the lowest level since March 2022. At Goldman Sachs, they expect the Bank of Canada to make a final 25 basis point increase to a final rate of 5.25% at the October meeting and that the Bank of England will decide on a 25 basis point increase in the fourth quarter and further increases by 4.85 points.
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