Last week, the ECB hiked interest rates by 75-bassis points, meeting estimates. Christine Lagarde, the head of the ECB made it clear that more interest rate hikes are in the pipeline as CPI in the eurozone is at a record high. In regards to, inflation, it seems as if things will get worse as the ECB increased its 2022 CPI forecast to 8.1%, and next year’s guidance was raised to 5.5%. This comes at a time when growth is waning, and serious energy security worries hang over mainland Europe. The euro saw a jump in volatility following the ECB’s hike, but the single currency still came under pressure versus some currencies, most notably, the US dollar. Jerome Powell, the Fed Chair, delivered a speech on the same day as the ECB meeting. Mr Powell reiterated his view the Fed will keep lifting interest rates until inflation is brought under control. Powell is determined to tighten monetary policy until the “job is done”. Earlier in the week, the US dollar index registered a new 20-year high and even though Jerome Powell issued a hawkish speech, the greenback cooled a little.
Looking to the week ahead, there will be a continuation of the central banking theme, as the Bank of England will hold a meeting. Since December 2021, the BoE lifted rates six times, and that saw rates being hiked from 0.1% to 1.75%. The most recent rise was a lift of 50-basis points. In June, the central bank only hiked rates by 0.25%, but there was speculation about a potential 0.5% lift. Given the pound sold off in the wake of the June lift, it seems as if the BoE did not want to make that mistake again, and that is why they hiked by 50-basis points last month. In recent weeks, sterling has come under pressure due to worries about rising debt, slowing growth, and rising inflation. It speaks volumes about sterling that it has been trending lower in recent months despite all the monetary tightening from the BoE. UK CPI will be published on Wednesday, and the rate currently stands at 10.1%, its highest in 40-years. At the most recent BoE meeting, Andrew Bailey, warned the UK inflation rate could reach as high as 13.3%. Considering Bailey’s comments, another rise in CPI would not be a surprise.
Inflation is also a hot topic in the US. As mentioned above, the Fed are keen to keep increasing interest rates to bring down CPI. Last month, at the Jackson Hole Symposium, Mr Powell implied the Fed will keep lifting rates even in the face of a cooling US economy. The central bank chief warned that more pain lies ahead, which dealers took as a sign that borrowing costs will keep rising. In August, it was confirmed the US CPI rate cooled to 8.5% from 9.1%, which is a step in the right direction as the Fed’s CPI target is 2%, which is clearly very far away. US PPI dropped to 9.8% from 11.3%, which is a sizeable fall, and it could be an early sign that inflationary pressure is easing. PPI measures the costs at the factory level, and if they are falling, it could be a leading indicator that costs are cooling. US CPI will be posted on Wednesday. On Thursday, the US will announce the retail sales reports. There is growing chatter that US workers are suffering as inflation is outstripping wage growth. The update will be of interest as it will show us how willing US consumers are to go out and spend money, as consumer activity will keep the economy motoring along.
