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Saturday 16th September 2023
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| | Hi Friend,
In latest central bank moves, the ECB raised rates by 25 basis points this week. In the monetary policy statement accompanying the move the ECB stated ...
"Based
on its current assessment, the Governing Council considers that the key
ECB interest rates have reached levels that, maintained for a
sufficiently long duration, will make a substantial contribution to the
timely return of inflation to the target."
Markets rallied, a clear indication further rate rises were on hold? Perhaps. Inflation is falling, growth is slowing. The interest-rate hike sparked a backlash from Italy and Portugal. Spain’s deputy premier expressed hope that its tightening push is now done.
Where
Are Rates Headed? Bet on Higher for Longer but probable not by much. A
further 25 point rise is possible in the U.S. and the U.K. The ECB is
indicating the high point in the cycle may well have been reached..
The Fed is more agnostic.
“It is certainly possible that we would raise funds again at the
September meeting if the data warranted,” Fed Chairman Jerome Powell
told reporters last month. “And I would also say it’s possible that we
would choose to hold steady at that meeting.”
Andrew
Bailey, Governor of the Bank of England was equally enigmatic. "I am
not going to judge what the path of rates will be, not least because
more than one path may deliver inflation back to target. We will judge
what is the most appropriate based on the evidence".
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| | Euro Base Rates ...
EU
annual inflation eased to 6.1% in July, down from 6.4% in June,
according to latest data from Eurostat, the statistical office of the
European Union.
Official figures showed that inflation in the Eurozone held at 5.3 per cent in August and July, from 5.5 per cent in June.
Inflation is expected to average 5.6% in 2023, before dropping to 2.9%
in 2024 and 2.2% in 2025 according to projections from ECB staff.
ECB staff have
lowered their economic growth projections significantly. They now expect
the euro area economy to expand by 0.7% in 2023, 1.0% in 2024 and 1.5%
in 2025.
At
the September meeting, the Council stated "Inflation continues to
decline but is still expected to remain too high for too long. The
Governing Council is determined to ensure that inflation returns to its
2% medium-term target in a timely manner.
"In order to reinforce
progress towards its target, the Governing Council today decided to
raise the three key ECB interest rates by 25 basis points. Accordingly,
the interest rate on the main refinancing operations and the interest
rates on the marginal lending facility and the deposit facility will be
increased to 4.50%, 4.75% and 4.00% respectively, with effect from 20
September 2023."
Based on
its current assessment, the Governing Council considers the key ECB
interest rates have reached levels that, maintained for a sufficiently
long duration, will make a substantial contribution to the timely return
of inflation to the target.
We expect rates (main refinancing operations) to peak at
4.50% in the third quarter. Deposit rates will increase to 4.00%. Slowing growth, inflation rates falling, no further rate hikes in prospect. Rates may be on hold for some time yet ...
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| | So What of the UK ... The MPC decision is expected on Thursday.The August inflation date is due out on Wednesday. For some analysts it's a close call, will the MPC stick or twist?
Inflation CPI eased to 6.8% in July from
7.9% in May. Core inflation, was unchanged at 6.9%. Inflation peaked in
October but inflation remains "sticky". Food inflation has eased to
14.9%. Energy costs collapsed to 4.5% from 23.3%. Service sector
inflation eased to 7.2% from 7.4%. Goods inflation slowed to 8.5% from
9.7%.
Producer Prices are moving in the right direction. Input
prices fell to -3.3% in July from -2.9% in June. Output prices moved to
-0.8 % from 0.3% prior month. We expect input and output prices to be
negative in Q3 and Q4. Headline consumer price inflation will drop below 5% in the final quarter of the year.
Markets and the MPC have
been spooked by the latest data on earnings. Earnings
increased by 8.5% in July.
The latest guarantees on public sector pay will continue to alarm the
hawks. Public sector pay increased by 10.5% in July.
The latest
GDP data suggests the economy expanded by 0.5% in the first quarter and
by 0.4% in the second quarter. In the first half of the year, growth was
0.4%. Unexciting maybe, but still suggests much of the gloom and doom
is overdone. The latest GDP ONS "Nowcast" suggest zero growth in July.
At
its meeting ending on 3rd August 2023, the MPC voted by a majority of
6–3 to increase Bank Rate by 25 basis points to 5.25%. Two members,
Jonathan Haskel and Catherine Mann preferred a 50 basis point hike.
Silvana Tenreyro opted to maintain Bank Rate at 5.0%. So much for group think!
Looking further
ahead, the MPC stated it will ensure that Bank Rate is sufficiently
restrictive for sufficiently long to return inflation to the 2% target
sustainably in the medium term.
We maintain our base rate peak this year at 5.5% on the basis of a further 25 basis point hike this month. We model 4.50% as the long run rate for base rates and ten year gilts in life after Planet ZIRP.
* 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
bond yields averaged 4.50%, real GDP growth averaged 2.5% and the
unemployment rate averaged 5%.
So What of the USA? Growth Forecasts will be revised up. We expect the FED to make the move. Full details are available on the Saturday Economist Web Site ...
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| | That's all for this week! Have a great weekend,
John
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| To understand the markets, you have to understand the economics ... and we do
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