No rate changes expected for the ECB Meeting this Thursday.
The ECB Governing Council will have a key policy meeting Thursday with no change in the interest rates expected at this meeting. Despite this, some council members are calling for a 50bps hike in the third quarter as the ECB starts the process of raising interest rates. Although others within the ECB are calling for rates to rise at a moderate pace of 25bps.
The inflation data for May will unnerve the ECB with the headline rate soaring from 7.4% to 8.1% in March and April, well ahead of expectations. There is now marked upward pressure on food prices as well as energy costs. Meanwhile, core inflation has been on a noticeable upward trajectory over the past four months. The HICP rate, excluding energy and unprocessed food, has climbed from 2.4% to 4.4% by May which indicates that price pressures are becoming more broad based in the Economy.
It is likely that we are still some months away from the peak in headline inflation. Consumer price rises in the Eurozone area during last summer was relatively modest. That is unlikely to be the case this summer. There has been a surge higher in oil prices in the past week after the EU announced a partial ban on oil imports from Russia. This will have a knock-on effect increasing household fuel and energy prices once again. There will likely be upward pressure on food prices due to concerns of global shortages. Thus, inflation in the euro area could easily reach 9% or higher by the end of the summer. This would increase the pressure on the ECB to move interest rates quickly into positive territory. Currently, it’s key deposit rate is pitched at -0.5%.
Market rate expectations have hardened appreciably in recent weeks. Futures contracts are now close to pricing in 125bps in rate hikes at the four ECB policy meetings due to be held over the second half of the year. This would bring the deposit rate to 0.75% by year end. There are also further rate hikes anticipated for 2023, with the market looking for the deposit rate to get to 1.75% by the end of next year. The sharp rise in inflation will weigh heavily on real disposable income and result in slow growth at best in the euro area economy over the second half of the year and into 2023.
There are expected to be sharp revisions to the ECB’s macro forecasts for 2022 and 2023 that will be published at Thursday’s meeting with inflation projections being upped significantly and growth cut compared to the last set of projections in March. Inflation should fall appreciably later this year, but it is uncertain how quickly it will return to the 2% target. Inflation is largely being driven by a surge in commodity prices amid global supply chain disruptions.
On the flip side, the likely weak economic backdrop should help inflationary pressures to eventually moderate considerably. Given all the uncertainty in the market, there is a wide margin of error in both directions surrounding expectations that official rates will be 1.75% by end of 2023 given all the uncertainties.
There is a relatively quiet week ahead in terms of data releases. In the Eurozone, the final readings of Q1 GDP and employment are due. Q1 GDP is set to be increased by 0.3% in the quarter, while employment is thought to have risen by 0.5%. German industrial production is projected to rise by 1.0% in April, having dropped by 3.9% in March.
In the US, the main highlight will be the May reading of CPI inflation. There are tentative signs inflation may have peaked in the US as both CPI and PCE inflation eased back slightly in April. However, inflation is still running at very elevated levels in the US. Headline CPI printed at 8.3% in April, while core inflation stood at 6.2%. It is expected that the headline rate will remain unchanged for May, indicating that the road back to 2% will be difficult. Although a positive is the core rate is forecast to edge lower to 5.9%. Elsewhere in the US, the Michigan measure of consumer sentiment is expected to deteriorate in June, from an already very low level.
There is very light data is the UK this week. Of the limited releases to note, the RCIS Housing Survey and the Halifax price index for May will feature.
|23:00||GBP BRC Like-For-Like Retail Sales (YoY)(May)||-3.5%||-1.7%|
|23:30||JPY - Overall Household Spending (YoY)(Apr)||-0.8%||-2.3%|