All Eyes on ECB’s Next Rate Decision

Market looks towards European Central Bank's next rate decision, inflation for China comes in later than expected, and insight from the Bank of England's senior economist.

Thursday will see Frankfurt make their latest interest rate decision as many of the 20 member eurozone bloc continue to battle elevated inflation and stagnant growth. During the ECB’s Policy Meeting on 27 July, Frankfurt raised rates by 25bps on their main refinancing operations (to 4.25%), marginal lending facility (to 4.5%) and the deposit facility (to 3.75%). Presently, money markets are implying that there is a 30% chance of a 25bps rate hike priced in for the ECB’s decision while also pricing in a 60% probability of a 25bps hike between now and the end of the calendar year.

Though headline inflation (currently at 5.3%) still remains well above the ECB’s target rate of 2%, policy makers are continuing to weigh on soft growth as monetary conditions tighten to

levels not seen since 2008. For example, data published on the 7 September showed that Eurozone growth continued to stall over Q2 2023. The 0.1% print came well below expectations of 0.3% growth and followed 0.1% contraction over Q4 2022 another marginal 0.1% expansion over Q1 2023. Stagnant growth from the powerhouses of Germany and France, softened global demand and the geopolitical fall-out from the conflict in Ukraine continue to cause headwinds for Frankfurt. As such, all eyes remain on their policy meeting later in the week and any rhetoric surrounding their future monetary course.

Chinese Inflation Comes in Soft

As the health of the Chinese economy continues to gather considerable market attention, over the weekend, Beijing indicated that CPI came in softer-than-expected. Headline inflation came in at 0.1% on an annualised basis, missing expectations of a 0.2% print. This came as clothing, housing and health costs picked up, while transport and food prices continued to slip. The miss raises concerns over the impact of dampened demand across the world’s second largest economy and follows July’s deflationary print where CPI fell into negative territory for the first time February 2021.

Easing inflation follows weakened businesses and consumer demand as the economy dips following the initial surge in spending after easing Covid restrictions. While Beijing have used monetary policy methods to try to encourage spending through cutting various interest rates, markets continue to speculate on whether the CCP will enact a major fiscal stimulus package to boost domestic demand and consumption. While smaller fiscal packages have been announced, as the FT notes, “these measures have thus far been perceived correctly as piecemeal and lacking conviction”. As such markets are still “holding out hope” that the government will put a “stimulus effort similar to the one seen in 2008”. However, with municipal governments ladened with debt and Beijing concerned about future outcomes, some are suggesting an unwillingness for the CCP to announce anything too major.

Pill to Speak

This morning is a little light on the data front, though at 9am, markets will turn their focus to the BoE’s senior economist Huw Pill. Markets will be keen to gain any insight into his monetary policy views, as investors gear up for the BoE’s next rate decision on 21 September. Last week, Pill indicated that there was a chance of “unnecessary damage” being put on the British economy if interest rates increase more than necessary. Here he stated that “now that policy is in restrictive territory, there is the possibility of doing too much and inflicting unnecessary damage on employment and growth”. He went further to add that “at present, the emphasis is still on ensuring that we are – in the words of the MPC’s last statement – sufficiently restrictive for sufficiently long to ensure that we have that lasting return to target”.