Tuesday, October 3, 2023
HomeEconomyTake 5: ECB - Big or really big rate hike

Take 5: ECB – Big or really big rate hike

(Reuters) – The European Central Bank is likely to raise interest rates sharply to combat soaring inflation.

Crude markets focus on the latest meeting of oil production group OPEC, while a new leader in Britain faces a litany of economic challenges.

Here are Dhara Ranasinghe, Tommy Wilkes and Vincent Fasseur in London, Kevin Buckland in Tokyo, Lewis Krauskopf on the market for the week ahead, Ira Iosebashvili in New York and Riddhima Talwani in New Delhi.


The ECB looks set for its second (significant) rate hike on Thursday – as economic conditions further Tighten policy before it gets worse.

With record high inflation rapidly approaching double digits, a key question is whether the ECB will adopt the 50 basis point plus information, as it did in July, or opt for the oversized -bps move.

Some (eg Goldman Sachs (NYSE: GS)) expected the latter after the latest inflation data, while some ECB officials think -bps should at least discuss the move.

Board member Isabel Schnabel warned that central banks risk losing public trust and must act forcefully to curb inflation, even if it drags their economies into recession.

Chart: ECB ready for second big rate hike – https://inew.news/wp-content/uploads/2022/09/localimages/chart.png6311b20aca9e8.png


Monday’s meeting of the Organization of the Petroleum Exporting Countries and allies including Russia could lead to renewed volatility in oil markets.

The OPEC+ meeting was in focus after Saudi Arabia recently raised the possibility of production cuts.

Soaring energy costs have plagued the global economy this year as Russia invaded Ukraine adding to supply concerns. Oil prices slowed in the summer as central banks raised interest rates to curb inflation amid some uncertainty about fuel demand.

Benchmark Brent recently retreated to Around $ per barrel 93.

Graphic: Crude oil prices become more volatile – https://graphics.reuters.com/GLOBAL -MARKETS/THEMES/egpbkrngqvq/chart.png


The new British Prime Minister will Boris Johnson’s announcement on Monday after nearly two months of campaigning as leader of the ruling Conservative Party. Promise tax cuts to kickstart economic growth. Her rival, former finance minister Rishi Sunak, accused her of making unfunded policy promises that would fuel inflation and threaten Britain’s public finances.

Those crowned leaders will face one of the toughest economic backdrops in decades. The Bank of England is raising interest rates quickly to curb soaring inflation, and while the UK economy is slipping into recession, the BoE’s forecast will last until 90.

In addition to addressing issues such as soaring energy bills, the new prime minister wants to reassure financial markets. British government bonds suffered their worst month on record in August, with the pound recently slumping to 2-1/2-year lows as investors fear the country is in worse shape than elsewhere.

Chart: UK government bond sell-off – https://inew.news/wp-content/uploads/2022/09/localimages/chart.png6311b20bc59ad.png

4/ Raise interest rates

RBA will launch another 50 – rate hike on Tuesday, As it struggles to rein in the highest inflation in more than two decades.

It has hiked rates every month since May, but RBA policymakers, analysts and investors all agree that since early ’90, the most aggressive austerity policy since then has a lot of work to do.

The central bank went horribly wrong from the start: Governor Philip Lowe had earlier said that borrowing costs would not rise until 2024.

AUD USD/USD has recovered and has been near six-week lows.

Meanwhile, the Bank of Canada is widely expected to raise interest rates again sharply on Wednesday.

Graphics: The Race to Raise Rates – https://inew.news/wp-content/uploads/2022/09/localimages/chart.png6311b20ccd1e7.png

5/Service Strength

Investors who gauge the direction of the Fed’s interest rates in the coming months got another piece of economic data on Tuesday, when the Institute for Supply Management (ISM) reported Results of its monthly services industry survey.

U.S. stocks weakened in days following Fed Chairman Jerome Powell’s hawkish message at the Jackson Hole meeting in August, leaving the Fed unquestionably determined to go all out to fight inflation.

However, upcoming economic indicators starting from the ISM index may affect the view of the rate trajectory, and signs of continued strength support the case for the Fed to continue action

The U.S. services sector unexpectedly picked up in July, adding to a slew of data showing several big interest rate hikes despite the economy still booming. Analysts polled by Reuters expected a reading of 54.8 for August.

Graph: Positive outlook for services – https://inew.news/wp-content/uploads/2022/09/localimages/chart.png6311b20dd0242.png




Please enter your comment!
Please enter your name here


Featured NEWS