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| Saturday 19th October 2024
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| Hi Friend,
The ECB Cuts Rates ... What Next For The Bank of England ...
This week, the European Central Bank made its first back-to-back interest rate reduction in more than a decade, reducing its key rate by 25 basis points in an effort to support the eurozone's weakening economy.
The bank lowered the main deposit rate to 3.25 per cent from 3.5 per cent in the third cut this year, reducing the cost of borrowing from a record high of 4 per cent.
The move came after a range of data reinforced concerns that the EU's major economies are struggling. Germany, is projected to expand by just 0.1 per cent this year, according to the OECD. The Eurozone economy as a whole is expected to grow by 0.7 per cent.
"Manufacturing and exports are weak. Firms are not investing much. Services have been doing a bit better, thanks to a good summer tourism season. Even though many people have more money to spend, they are preferring to put it aside, even more so than before the pandemic." The ECB said. "The saving rate stood at 15.7 per cent in the second quarter, well above the pre-pandemic average of 12.9 per cent."
Inflation across the twenty nations fell to 1.7 per cent in September, below the ECB's target, from 2.2 per cent the previous month . Wage pressures have also cooled more quickly than expected.
In a statement announcing the latest rate reduction, the governing council stated: "The incoming information on inflation shows that the disinflationary process is well on track."
"We're breaking the neck of inflation" Christine Lagarde said in the Slovenian capital of Ljubljana as she announced that the European Central Bank was cutting interest rates. It's not broken completely yet, but we're getting there."
Markets now see a high chance of rates being lowered by a further 25 basis points in December. The ECB is leading the way in comparison with the Fed and the Bank of England. The Euro is paying the price ...
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| | The Bank of England Set To Cut Rates in November ...
The pound dropped sharply to its lowest level in two months after inflation fell by more than expected last month.
Sterling dropped 0.6pc against the dollar to below $1.30 for the first time since August after the consumer prices index fell to 1.7pc in September, according to the Office for National Statistics.
The FTSE 100 jumped higher as money market traders priced in an interest rate cut by the Bank of England next month, from 5pc to 4.75pc, as closely watched services inflation fell below 5pc for the first time since May 2022.
Money markets imply there is a 76pc chance of a further reduction in borrowing costs in December, up from a 48pc chance on Tuesday.
Don't get too excited by the drop in headline CPI Inflation ...
CPI the consumer prices index fell to 1.7pc in September from 2.2% in August. Headlines heralded the fall in inflation to below the MPC target but don't get too excited by the drop in headline CPI Inflation below target. It may not last.
Headline prices were flattered by the drop in goods inflation to -1.4% in the month. Lower oil prices and higher Sterling levels made the assist. Brent Crude averaged $74.00 dollars this year compared to $94.00 dollars in 2023. Sterling averaged $31.32 compared to $1.24 last year. That's a 26% drop in oil costs Sterling adjusted.
Core inflation excluding food and energy eased to 3.2% from 3.6%. Concerns remain about the high level of service sector inflation at 4.9% even as job market cools and earnings fall significantly.
The drop below the 2% level will not be sustained. Goods inflation is set to rise, even as service sector inflation falls below 4%. The headline rate is set to return to the 2.5% - 3.0% level in the first quarter next year. The MPC may see some leeway for a 25 basis point cut at the next meeting in November but caution will prevail, despite some good news on wages costs in the Labour Market Update this week ...
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| | Wage Rates Ease as Unemployment Falls ...
Some goods news for the Government and the Bank of England in the Labour Market Update released this week by the Office For National Statistics, (ONS). Unemployment fell from 1.437 million to 1.386 in the period to August. The unemployment rate eased to 4.0% from 4.1%.
More people in work, the employment rate increased to 75% as employment increased to 33.4 million. Vacancies eased back to 841,000 in September from over 900,000 at the start of the year. We expend a trend return to 750,000 into 2025.
The really good news for monetary policy was the slowdown in wage inflation. In the three month average to August, whole economy total earnings increased by 3.8%, down from almost 6% in April. One note of caution the month single rate in August is estimated at 4.4%. Confused? You will be.
The trend in wage inflation will increase the probability of a rate cut in November and possibly one further cut in the first quarter of 2025. It is difficult to see a second cut for Christmas as some traders expect.
Long Term Note : In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year gilt yields averaged 4.50%, real GDP growth averaged 2.5%, earnings averaged 3.5%, the unemployment rate averaged 5% and vacancies averaged 650,000.
That means no return to Planet ZIRP ...
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| Have a great weekend ...
John
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| Planning an event? Want great overviews on economics and financial markets Drop Me A Line .... Let's Face It! There's Lots To Talk About '' J
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References This week's post relies on extracts from our daily "What the Papers Say Review." Certain research and photo content has also been generated using Perplexity AI. This is our favorite AI research tool. Photos are from Adobe Stock and The Saturday Economist Slide Deck.
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| © 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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