(Bloomberg) – The European Central Bank in the coming week will trample the territory it last visited before the global financial crisis as it raises interest rates during what appears to be a recession.
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It was in July 2008, just as the euro area began four quarters of contraction, that the Governing Council raised borrowing costs for the first time in more than a year, only to reverse course soon after the collapse. US investment bank Lehman Brothers inflicted unprecedented market turmoil.
This time around, officials are facing much higher inflation, fueled by risks of a different order as the energy crisis triggered by the Russian war in Ukraine raises the cost of living and crushes economic growth.
As with central banks from Canada to Colombia likely to tighten policy, the ECB’s need to raise rates to prevent consumer prices from spiraling out of control will keep policymakers focused, even as the risk of a crisis looms more than ever. .
That’s why, even though many economists now believe a recession has begun in the euro region, they unanimously anticipate another whopping 75 basis points hike on Thursday.
Memories of what is now perceived as a political blunder in 2008 may still haunt the ECB, especially as rates rise again and begin to hold back growth in due course. Such a prospect is likely to make future hike decisions in 2023 more controversial, although this will not.
What Bloomberg Economics says:
“The ECB will focus on the very high rate of inflation and continue to raise interest rates as the economy weakens. We are looking for another 75bp hike in October and the deposit rate to end the tightening cycle at 2.25% in February. “
– For the full analysis, click here
Elsewhere, gross domestic product reports could show a return to growth in the United States, a contraction in Germany and a slowdown in France. The selection of a new UK prime minister and likely unchanged rate decisions in Japan, Russia and Brazil will be among other highlights.
Click here for what happened last week and below is our rundown of what’s happening in the global economy.
United States and Canada
The calendar includes the U.S. government’s first estimate of third-quarter growth, as well as September personal consumption, income and inflation data.
GDP may have grown at an annualized rate of 2.3% during the July-September period after contracting in both the first and second quarters, according to economists interviewed by the Bloomberg project. The Atlanta Fed’s GDPNow estimate puts third quarter growth at 2.9%.
The details of the report will provide clues to the level of consumer and business demand at a time of heightened inflationary pressures and in the midst of the Fed’s series of huge rate hikes. Incidentally, aggressive policy tightening has likely led to a slump in residential investment in the third quarter.
The Atlanta Fed estimates that personal consumption grew at a rate of 1.2% in the quarter, which would be the slowest advance since the first months of the coronavirus pandemic. However, after a hiatus in the previous three months, business expenses for equipment started to rise again.
Friday’s September revenue and expenditure report will indicate how much momentum, if any, the economy has had as we enter the fourth quarter. The data is also expected to show an increase in a key measure of inflation observed by Fed officials after a similar metric has risen to a 40-year high.
Fed policymakers will find themselves in a blackout period ahead of the November 1-2 meeting, during which they are expected to raise the benchmark lending rate by 75 basis points for the fourth consecutive time.
Further north, a faster-than-expected inflation reading has left economists divided on how aggressively the Bank of Canada will raise rates on Wednesday. Some stick to forecasts of a half-point move, while others expect a 75 basis point increase, in line with financial market expectations.
If Ottawa officials opt for the broader option, this would bring the benchmark overnight lending rate to 4% for the first time since early 2008.
China will unveil a new leadership team over the weekend, with investors taking a close look at what this could mean for economic policy. They are also looking forward to the delayed release of China’s third quarter GDP data and September readings on struggling retail sales, investment, manufacturing and housing.
With Tokyo still keeping an eye on the yen, the Bank of Japan meets to decide policy. Governor Haruhiko Kuroda insists he will keep rates lower to stimulate the virtuous form of inflation he has sought for nearly a decade, even as markets continue to put pressure on the BOJ’s currency and yield limit.
On Tuesday, Australian treasurer Jim Chalmers unveils a budget update, the first since the Labor Party’s election victory. The next day, the latest Australian price data will show headline inflation running at the fastest pace since 1990.
South Korea releases GDP figures on Thursday which are expected to show slower growth. And in Southeast Asia, Singapore releases its latest inflation print which will likely show price gains remain at 14-year highs, while the Philippine central bank will be kept an eye on as it seeks to defend the currency from further losses.
Europe, Middle East, Africa
The UK’s ruling conservative party will rush through a leadership contest next week in the wake of Liz Truss’s resignation as prime minister following a failed budget that caused unspeakable financial market turmoil.
Hastily announced rules mean a result can emerge as soon as Monday, on the grounds that in a narrow field of two candidates, the one with the least support will face pressure to pull out and be done with it.
Whoever wins will inherit an economy that struggles to shake off long-term decline. A long-awaited tax plan may attempt to address it, and events in the coming days will determine whether the proposal will be announced on October 31 as scheduled or rejected.
While ECB policymakers will focus on their rate decision on Thursday, euro area economic growth data will also attract attention.
Purchasing Managers Surveys are scheduled for October on Monday, while third-quarter GDP in three major countries will be released on Friday. Germany is likely to show contraction while the French and Spanish economies have likely slowed significantly.
Sweden, which is now facing as severe a housing slump as it did during the financial crisis, is also likely to have seen a contraction in GDP in the quarter. Those data are due on the same day.
Also on Friday, Russian policymakers are likely to suspend easing as inflationary pressures mount and growing uncertainty over the invasion of Ukraine undermines confidence.
Elsewhere in the region, South African Finance Minister Enoch Godongwana will present his second mid-term budget on Wednesday, with better-than-expected tax collection and higher nominal GDP likely to lead to improved key metrics.
It will also provide details of the Treasury’s long-awaited plan to take over a portion of the rand 413 billion ($ 22.8 billion) debt of the state-owned Eskom Holdings SOC Ltd.
On the same day, the central bank of Namibia will likely raise rates by 75 basis points to safeguard its currency peg with the rand and tame inflation.
A record round of central bank tightening and slowing growth finally seem to have the upper hand on Mexican consumer prices, as Monday’s data should show. The headline figures likely peaked eventually, although the headline readings could have risen by 8.29%.
In a busy week for Brazil, analysts expect consumer price increases to slow for a fifth month through mid-October, with the broadest measure of inflation just above 7%.
With this data in hand, the central bank will almost certainly hold its key rate at 13.75% for a second meeting on Wednesday. The bank has signaled its intention to hold the higher Selic benchmark for longer. Data on unemployment and formal job creation are also available.
On Thursday, the minutes of the October 12 Banco Central de Chile meeting could offer further guidance after policymakers concluded a cycle of record hikes at 11.25% and said they will keep the rate there “for as long as necessary. “. Chile also reports data on labor, production, copper production and retail sales.
Closing the week, Colombian Banco de la Republica is expected to encounter inflation at 11.44% and still rising, the peso close to all-time lows, and the president begging investors to keep their cash in the country. Analysts are looking for a 100bp hike to 11% on Friday with further tightening to come.
– With the assistance of Robert Jameson, Vince Golle, Benjamin Harvey, Malcolm Scott and Theophilos Argitis.
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