ECB poised to cut rates again as part of Fed warming act

(Bloomberg) — The European Central Bank is likely to cut interest rates Thursday in a prelude to a U.S. move next week, as the global monetary cycle leans toward more synchronized easing.

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Euro zone officials have signaled they will offer a second cut in borrowing costs following the move in July, which will be watched by investors looking for policymakers’ intentions for any further steps later this year. At least one more reduction is likely in 2024.

With the Bank of Canada’s Sept. 4 rate move, the timing of the ECB meeting — days before the Federal Reserve’s initial rate cut expected on Sept. 18 — underscores how major advanced economies are now shifting more in tandem as officials are pivoting to support the economy. growth now that they believe inflationary risks have faded.

In the euro zone, the easing of a key measure of wage growth during the second quarter will help cheer policymakers.

Similarly, a U.S. consumer price report due on Wednesday may give Fed officials reassurance that inflationary pressures are stabilizing, after data on Friday showed U.S. employment came in below forecasts.

For investors, the question looming over this month’s meetings is the extent to which such rate cuts herald a deeper cycle of easing that could not only lift constraints on major economies, but also kick-start them.

What Bloomberg Economics Says:

“We expect the ECB to cut another 25 basis points in December. However, the high rate of wage growth and embedded service inflation should prompt the Board of Governors to refrain from committing to this in advance.”

— David Powell, Senior Economist. For a full review, click here

The growth outlook will be a focus when ECB President Christine Lagarde addresses reporters on Thursday – not least in light of recently released data showing that second-quarter expansion was weaker than initially reported.

Governing Council officials are believed to be more comfortable changing rates at meetings like the upcoming one, when they have new quarterly forecasts in hand. That would make a further cut in December more likely than one at their next meeting on October 17.

Elsewhere this week, inflation data from China, UK wage figures and rate decisions from Pakistan to Peru are among the highlights.

The story continues

Click here for what happened last week, and below is our list of what’s happening in the global economy.

USA and Canada

Fed officials are entering a period of blocking public events ahead of their meeting. Before that, Gov. Christopher Waller said after Friday’s jobs report that it was important to start cutting rates. Waller also noted that he is “open-minded” about the potential for a larger cut. “The current batch of data no longer requires patience, it requires action,” he said.

The labor market is top of mind for Fed policymakers as price pressures have cooled. The August CPI report is expected to show a measure of core inflation, which excludes food and energy, rose 0.2 percent for a second month. On a year-over-year basis, the core CPI likely rose 3.2%, equaling July’s annual figure, which was the lowest since 2021.

Other US data next week includes August producer prices, weekly jobless claims and the University of Michigan’s September preliminary consumer survey.

Looking north, Bank of Canada Governor Tiff Macklem will speak in London about changes in global trade and investment from a Canadian perspective and take questions from reporters. Meanwhile, national balance sheet data will shed light on household net worth and the debt-to-income ratio in the second quarter.

Asia

China is front and center, starting with data on Monday that is expected to highlight continued fragility in domestic demand.

Consumer inflation is seen rising only slightly at what would still be an anemic pace of 0.7%, while declines in factory prices are forecast to deepen.

Data at the end of the week could add to the gloom, with growth in industrial production, retail sales and fixed asset investment likely to have moderated in August, while housing investment is seen falling by double digits for the fourth consecutive month . .

Elsewhere, Japan’s economic recovery in the second quarter may be revised slightly higher after taking into account strong capital investment data for the period.

India’s August inflation data on Thursday could tip the Reserve Bank of India toward an October interest rate cut, according to Bloomberg Economics, which expects price growth to slow for a second month.

Trade figures are due later in the week from China, India, Taiwan and the Philippines, and Australia gets indicators on consumer and business confidence on Tuesday.

On the monetary front, Pakistan’s central bank is expected to cut its key rate on Thursday for the third consecutive meeting. His counterpart in Uzbekistan also decides policy that day.

Europe, Middle East, Africa

UK data may attract investors’ attention. Tuesday’s payrolls number is likely to show weaker wage pressures, although the annual pace of growth still remains more than double the Bank of England’s 2% inflation target.

Monthly gross domestic product was expected by economists on Wednesday to show modest growth in July, pointing to a tepid start to the third quarter. And the BOE will publish its latest survey on inflation expectations on Friday.

Turning to the Eurozone, industrial production figures from Italy, Spain and the region as a whole will also give an indication of the state of the economy there at the start of the second half of the year. Based on the performance of Germany and France in data released on Friday, it is likely that the overall economy was on a weaker footing.

In Germany itself, Finance Minister Christian Lindner will present the country’s 2025 budget to parliament on Tuesday, followed by remarks the next day from Chancellor Olaf Scholz and other government ministers.

Elsewhere on the continent, inflation figures from Norway and the Czech Republic on Tuesday and Sweden on Thursday will be closely watched as central bank policymakers assess the lingering strength of price pressures.

Turning south, traders will watch Egypt on Tuesday to see if inflation eased for a sixth consecutive month. It peaked at 36% in February, but has since fallen below 26%, thanks in large part to massive international aid.

Similarly, a report on inflation expectations on Thursday will inform policymakers at the South African Reserve Bank, which uses figures from two years ahead to guide its decision-making. A drop to the midpoint of 4.5%, where the central bank prefers to anchor them, will add impetus to its first rate cut since the height of the pandemic.

Apart from the ECB, several other rate decisions are scheduled:

• On Thursday, the National Bank of Serbia may leave its rate at 6 percent after inflation rose in July for the first time in more than a year.

• Over the next day, attention will focus on whether the Bank of Russia continues to tighten after raising borrowing costs by 200 basis points in July. Wednesday’s data could show that inflation has passed an annual peak.

Finally, the International Monetary Fund is due to complete a review of Ukraine’s economy and finances next week and will announce whether the lender’s board should approve the next tranche of a $15.6 billion loan for the war-torn country.

latin america

Latin America’s three largest economies will report consumer price data from August as the region’s central bankers recalibrate monetary policy.

On Monday, Mexico’s national statistics institute is likely to report that inflation fell to 5.05 percent from 5.57 percent the previous month. The cost of living nationally has been propelled by rising prices of services, fruit and vegetables in recent months.

Still, the slowdown now expected will give the central bank more room to consider another rate cut later this month to shore up a weak economy.

The next day, Brazil is expected to report that inflation has fallen from the 4.5% ceiling of the central bank’s tolerance range. Any decrease means limited relief; policymakers face pressure to raise borrowing costs in September due to price risks including rising government spending, robust economic growth and a weaker currency.

Argentina will finally release its data on Wednesday as President Javier Milea’s administration touts progress in efforts to tame the cost of living.

Monthly price increases have indeed fallen from 25.5% in December – when Milei’s government took office – to 4% in July. Annual inflation is still well over 200%.

–With assistance from Matthew Malinowski, Brian Fowler, Laura Dhillon Kane, Monique Vanek, Paul Wallace and Tony Halpin.

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