ECB to hike interest rates

Emily Nicol
Chris Scicluna

We expect the ECB to hike rates by a further 25bps on Thursday, but with relatively low conviction
In terms of monetary policy, the main event this week will be the ECB’s decision on Thursday, although the outcome of this meeting remains too close to call with confidence. Following the July Governing Council meeting, ECB President Lagarde opened the door to a pause in the tightening cycle this month, and insisted that the decision would be dependent on the data released between then and now. Given the marked deterioration in recent survey indicators and likelihood that much of the impact of the substantive monetary tightening already implemented has yet to be fully felt, we think that a pause in the rate-tightening cycle would now be prudent. However, the hawks have had a majority on the Governing Council for more than a year. And with most hard macroeconomic data not having deteriorated as far as the survey indicators, headline and core inflation still too high for their comfort, and the inflation outlook still very uncertain, we think that a hawkish majority will still hold. So, we currently expect the ECB to hike rates once again this week, by 25bps, taking the deposit rate to 4.00% and the cumulative tightening since last July to 450bps. But while the Governing Council will also signal that rates are likely to remain at an elevated period for as long as necessary, and additionally state its readiness to tighten policy further if incoming data demand it, that should represent the peak in rates for this cycle.

In terms of economic data, it should be relatively quiet for releases. Ahead of the ECB decision, euro area industrial production figures for July are due for release on Wednesday. Despite upside surprises to French and Spanish IP releases, the weakness in Germany and a notable drop in Ireland (-6.6%M/M) will see euro area production fall at the start of Q3, by around 1%M/M. Meanwhile, the euro area goods trade report (Friday) is expected to report a narrowing in the trade surplus amid soft external demand. Focus on Friday will also be on the latest euro area labour costs figures for Q2, which are likely to report a slight moderation from growth of 5.0%Y/Y in Q1, but remain too high for some members on the Governing Council

UK labour market data expected to show that employment fell but that wage growth remains too strong for the MPC’s comfort
This week’s UK dataflow will also include several top-tier releases that will feature in the discussion at this month’s MPC meeting (21 September), with arguably of most note tomorrow’s official labour market figures. After Friday’s REC report on jobs suggested that permanent placements fell by the most in more than three years in July, employment is expected to have fallen in the three months to July, by the most since the start of 2021. So, after the unemployment rate unexpectedly rose in the three months to June to 4.2% – and the single-month rate rose to a 25-month high of 4.6% – we might well see a further uptick in the three months to July. And with the REC measure of permanent job offers the softest since February 2021, vacancies are likely to have slowed further too. But with wage growth having surged in the three months to June, by 1ppt to 8.2%3M/Y, and private sector regular pay growth also up to series high (8.2%3M/Y) barring the pandemic distortions, the pay data might be most closely watched by MPC members. While private sector wage growth might well have eased slightly in the three months to July, it will still be notably higher than the BoE staff projections in August’s Monetary Policy Report and still well above levels that might reasonably be considered consistent with achievement of the Bank’s inflation target over the medium term.

Another key focus this week will be Wednesday’s release of the July GDP report. Surveys have signalled a weakening in economic momentum at the start of Q3, while wet weather dampened demand on the high street and public sector strikes likely impacted activity too. As such, we expect GDP to have fallen in July, albeit not fully reversing the 0.5%M/M growth recorded in June. We expect output in manufacturing, services and construction all to have declined. Among other releases due, the BoE’s household inflation attitudes survey (Friday) will be watched by the MPC – with all of the survey measures of household inflation expectations having dropped over the past two quarters, the key medium-term (5-years ahead) measure could well drop to a two-year low below 3.0%Y/Y.

US CPI report a key focus this week, with headline inflation expected to have been boosted by higher energy prices
Ahead of the Fed’s latest policy decision on 20 September, a key release in the US this week will be the August CPI report on Wednesday, closely followed by PPI figures (Thursday) and the University of Michigan consumer price expectations indices (Friday). Given the recent pickup in energy prices, Daiwa America’s Lawrence Werther expects consumer prices to have jumped in August, by 0.6%M/M (in line with the Bloomberg survey consensus), the most since June 2022. This would leave headline inflation up almost ½ppt from the 3.2%Y/Y rate in July, but nevertheless still well below the peak of 9.1%Y/Y in June 2022. When excluding food and energy, core prices are expected to have risen a moderate 0.2%M/M as in the previous two months, to leave the annual rate down 0.4ppt to 4.3%Y/Y, which would be the lowest since October 2021. Likewise, producer prices (Thursday) are expected to have picked up slightly on the back of higher energy prices.

In terms of activity figures, August retail sales (Thursday) and industrial production reports (Friday) are scheduled. Despite a decline in auto sales, the value of retail sales is expected to have accelerated over the summer, as sales at service stations are inflated by higher petrol prices. Werther expects growth of 0.4%M/M (a touch firmer than the Bloomberg survey consensus of 0.1%M/M). Meanwhile, industrial production is expected to have slowed over the summer, with growth of 0.3%M/M following a rise of 1.0%M/M. But given the weakness in May and June this would leave a broadly flat trend.

Japanese business survey, industrial production and tertiary activity data to provide an update on economic conditions in Q3
A relatively quiet week ahead for Japanese data will bring the government’s latest business outlook survey on Wednesday, which will update on economic conditions, employment, profit growth and capex intentions. The survey will also provide business expectations for the near-term outlook in Q423 and Q124. In terms of hard activity data, updated industrial production figures (Thursday) are likely to confirm that output fell in July, with the preliminary release having reported a drop of 2.0%M/M. Machine orders numbers (Thursday) are also expected to have slipped back in July. Meanwhile, tertiary activity data (Friday) are expected to have posted a modest increase in July (0.3%M/M), largely reversing the drop in June. In terms of inflation, Wednesday’s release of producer price figures are expected to maintain the steady disinflationary trend, with the headline inflation rate expected to have eased (down 0.3ppt to 3.3%Y/Y) to its lowest since March 2021.

Chinese CPI rate back in positive territory while credit growth beats expectations; August activity data due at end of the week
In line with expectations, Chinese CPI inflation returned marginally to positive territory in August, rising 0.4ppt to 0.1%Y/Y. The increase reflected a slightly firmer energy component, while core inflation excluding food and energy was unchanged at July’s 11-month high of 0.8%Y/Y. Meanwhile, the annual rate of decline in producer prices moderated somewhat but remained non-negligible, with PPI inflation up 1.4ppts to -3.0%Y/Y, just 0.1ppt below the consensus forecast, to be consistent with continued excess capacity. Given the soft inflation environment, further policy easing can’t be ruled out at the end of this week. However, today’s credit growth figures beat expectations, e.g. with new yuan loans accelerating to CNY1.36trn from just CNY0.346bn in July, suggesting that government actions might well be seeing results. Friday will be this week’s other key day for data, with the August monthly economic activity data expected to report continued softness in retail sales growth (just 2.5%Y/Y in July). But with the official manufacturing PMI having risen to a 5-month high of 49.7 last month, they might also provide hints of improvement in industrial production (3.7%Y/Y in July) in response to policy support despite continued weakness in exports.

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