15 September 2023
It was a busier week for economic data this week. Starting in Europe we had the European Central Bank (ECB) meet to set interest rate policy. The market was relatively divided ahead of it, with some market commentators expecting no move whilst others expected a 0.25% hike. The latter proved correct, with the ECB hiking rates for the 10th consecutive time, taking rates to 4.5%. Post decision comments from the central bank however appeared to suggest that hikes, for this year at least, may now have come to an end. Firstly, it was believed that “monetary policy tightening is transmitting much faster than in past cycles.” This would appear to suggest that previous rate hikes are already having an impact on households and potentially corporates.
In another statement, President Lagarde said that “based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” The ECB will be keen not to make a policy mistake. For this reason, it is likely that they will be keen to see what the lagged effect of previous hikes has, both on inflationary pressures and economic growth.
Looking at the long term chart of interest rates in the Eurozone, it is clear that when interest rates have reached these lofty heights they have sharply retraced. Will we see the same this time or, given inflation pressures, will we see an extend period where the ECB are in hold mode.
In the UK there was good news for the consumer, with average earnings including bonuses to July coming in above consensus, at 8.5% versus 8.2%. Wage increases in the public sector were the main driver, rising 12.2%, which compared to 7.6% in the private sector. This means that we now have positive real wage growth which should be a positive for the consumer. This didn’t show up in the economic growth figures for July, however, which contracted by a larger than expected 0.5% month on month, with the service sector leading the decline.
In the US meanwhile all eyes were on inflation data. Year on year we saw a figure slightly above consensus, at 3.7% versus 3.6% to August. The figure was higher than the previous month reading of 3.2%, but much of this was due to a higher oil price and base effects from last year. Core inflation meanwhile came out in line with expectations at 4.3%, below the previous months reading of 4.7%. Contributing to this figure was a slowdown in inflation in areas such as shelter and new cars. Used car prices meanwhile continued to fall.
Markets are now grappling with just how high the central banks of the UK, Eurozone and US will be willing to take their interest rates. It certainly appears that rate cuts still remain out of sight, but to pause, or not to pause, that is the question!
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