The European Central Bank dilemma
CNBC: A potential rate hike in September to address persistent inflation vs. concerns of economic downturn. ECB’s policy stance hinges on a delicate balance between price growth and a weakening economic outlook. Mario Centeno emphasizes the need for caution due to subdued eurozone growth and existing measures. Notably, novel labour market flexibility could impact inflation contribution positively.
European Central Bank’s policy rates
As reported by Breaking News Networks: In a recent seminar, Christine Lagarde, President of the European Central Bank (ECB), emphasised the ECB’s record pace of policy rate increases, totalling 425 basis points over the past year, as an expression of the institution’s commitment to achieving a timely return of inflation to its 2% medium-term target. The upcoming ECB meeting on September 14 will be a pivotal moment, where officials will assess whether the recent economic slowdown justifies a potential pause in the ongoing cycle of tightening. Euro-zone inflation figures for August indicated a slowdown, dropping to 5.3% from 5.5% the previous month. However, concerns about a deepening contraction in private-sector activity have raised questions about the economic outlook. Currently, money markets assign roughly a one-in-four chance of the ECB raising rates by a quarter-point to 4% in the upcoming meeting. Stay tuned for further developments in ECB policy.
Cebr forecasts more rate hike increases
The Guardian report: Thinktank Cebr forecasts more rate hike increases and anticipates 28,000 insolvencies in the coming year. Approximately 7,000 business failures are expected per quarter in 2024 due to financial strain and economic challenges. Notably, insolvencies in Q2 2023 were 50% higher than the pre-pandemic levels in Q2 2019. Bank of England’s interest rate has seen 14 increases since the end of 2021, rising from 0.1% to 5.25%.
Bank of England and UK inflation
Former BOE rate-setter Michael Saunders suggests the Bank of England may be finished with tackling UK inflation, citing economic cooling and loosening labour market signs. Birmingham City Council issues a Section 114 notice due to financial challenges.
Inflation expected to decline?
Inflation is expected to decline significantly by year-end, says Andrew Bailey, The Bank of England Governor, hinting at nearing peak interest rates. He sees rates ‘much nearer to the top of the cycle’ after 14 consecutive hikes. Bailey: ‘Indicators signal a continued fall in inflation, marked by year-end.’ Wage growth data key for rate policy.
Bank of Canada maintains rates
Reuters: The Bank of Canada maintains the overnight rate at 5% amidst weaker economic growth. Q2 2023 saw a 0.2% contraction due to reduced consumption, housing activity, and wildfires’ impact. Household credit growth slowed due to higher rates. Domestic demand grew 1%, backed by gov’t spending and business investment. Labour market tightness easing, with 4-5% wage growth. Concerns about inflation persist; policy rates may rise if necessary.
UK lenders’ rates
The Guardian reports: UK lenders started cutting their rates in the latter half of July, following news that UK inflation had fallen more than anticipated in June. This reduction prompted speculation that the Bank of England might not raise interest rates as aggressively as previously expected. HSBC and NatWest have taken steps to reduce mortgage rates, and this move is expected to be followed by other major UK lenders. NatWest, in particular, has unveiled reductions of up to 0.35 percentage points on selected fixed-rate deals. For instance, a five-year fixed-rate deal designed for homebuyers with a 5% deposit, currently priced at 6.39%, will see its rate decrease to 6.04% at NatWest.
White House Urges Short-Term Funding Solution
Reuters: Congress seeks to prevent shutdown with a stopgap measure, allowing time for a broader spending agreement. Funding challenges highlight vital cash-starved programs, like nutritional aid for low-income families. The looming Sept. 30 deadline sparks concern over the potential shutdown as the government faces financial crunch. Past shutdowns reveal economic repercussions, including reduced productivity and Gross Domestic Product (GDP) impact. Shutdowns bring economic insecurity for federal workers, emphasizing complex consequences.
Australia’s hopes of benefiting from China uncertain
According to The Guardian, Australia’s hopes of benefiting from China’s recovery face uncertainty as concerns rise on China’s Stalled Growth and Property Crisis. Challenges loom as foreign investment slows alongside the property crisis with Evergrande and Country Garden. Youth unemployment, though suspended from the data series, raises concerns. A potential Chinese downturn could impact Australia’s economy through reduced exports and investment. Rising unemployment and fiscal implications may follow. Veteran mining analyst Peter Strachan highlights immediate effects on exports and commodity prices. The Australian dollar is closely tied to iron ore prices.
CNN: Saudi Arabia aims for $81 per barrel to balance the budget, while Russia reduces exports to support Ukraine’s conflict despite EU efforts to cap Russian oil prices. Most Russian oil is still trading above the cap.
According to JPMorgan analysts, gold investment has surged due to central bank purchases, pushing non-bank allocations to 2012 highs. High compared to history. Central bank’s demand may hold the key, but Q2 2023 shows normalization. Now, the outcome of gold prices hinges on this development.
Federal Reserve Bank of New York President John Williams acknowledges their current monetary policy is “pretty clear we’re restrictive,” but it’s an open question whether they need to further curb economic activity to rein in inflation to 2%. Dallas Fed President Lorie Logan suggests they may skip a rate increase at the next meeting, but more tightening may be necessary for timely inflation control. Chicago Fed President Austan Goolsbee hints at a pause in rate hikes, focusing on how long rates will stay high to reach the 2% inflation target.
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