ECB further interest rate hikes expected.

European Central Bank policymakers see a rising risk that they will have to raise their key interest rate to 2% or more to curb record-high inflation in the euro zone despite a likely recession.

With inflation hitting 9.1% in August and seen above the ECB’s 2% target for two years to come, the central bank has been raising its interest rates at record speed and urging governments to help bring down energy bills that have ballooned since Russia invaded Ukraine.

The ECB raised its deposit rate from zero to 0.75% on Thursday and President Christine Lagarde guided for another two or three hikes, saying rates were still far away from a level that will bring inflation back to 2%.

Traders still expect the Fed to deliver a third 75-basis point rate hike at its Sept 20-21 meeting, lifting the benchmark rate to 3%-3.25%, though they have pared that probability to 60% from 70% before the report, based on the CME Fedwatch tool. Fed Chair Jerome Powell a week ago said the Fed will raise borrowing costs high enough to start biting into growth, soften the labour market and bring down inflation, but said the size of September’s rate hike would depend on the “totality” of the data before then.

This week, the monetary policy spotlight was supposed to be on the Bank of England. However, in light of the period of national mourning now being observed in the UK, the meeting has been postponed until Thursday, 22nd of September. As a result, the focus shifts to the data schedule and some key releases that could influence monetary policy.

UK inflation, headline CPI jumped in July to 10.1% from 9.4%. Core CPI rose to 6.2% from 5.8% also. The BoE forecasts that CPI inflation could peak above 13% in October. The Government’s plan to cap household energy prices though, should help to reduce the peak in UK inflation. The consensus is for headline CPI to rise to 10.2% and core CPI to edge higher to 6.3% in August. Tight conditions in the labour market have increased the risk of a wage-price spiral taking hold.

The jobless rate was at 3.8% in June, a near fifty year low, while average earnings were up 5.1% year on year. The former is projected to remain at 3.8% in July, while the later is forecast to inch up to 5.2% year on year. Meanwhile, it is envisaged that GDP rebounded by 0.5% in July, having contracted by 0.6% in June, partly due to an extended bank holiday weekend.

Economic Calendar

06:00GBP Gross Domestic Product (MoM)(Jul)0.5%-0.6%
06:00GBP Industrial Production (MoM)(Jul)0.4%-0.9%
06:00GBP Manufacturing Production (MoM)(Jul)0.6%-1.6%
06:00GBP Manufacturing Production (YoY)(Jul)1.7%1.7%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.