United States of America
In view of the fact that the inflation rate data of the United States and the euro zone have sent relatively positive signals, the market has been waiting for the decisions of the “central bank” such as the Federal Reserve meeting, the European Central Bank meeting, and the Bank of Japan meeting.
While the Fed and ECB are widely expected to decide on a 25 basis point rate hike, in the meantime, all eyes will be on statements from monetary policy chiefs and their hints about future trends.
United States of America
According to CME FedWatch, the market is pricing in a 98.9% chance (to a range of 5.25-5.5%) of a 25 basis point rate hike at this monetary policy meeting for the Fed’s upcoming decision.
This reflects the end of the Fed’s policy peak of tightening monetary policy, consistent with positive indicators affecting inflation rates last June, as follows:
- US annual inflation was 3% in June (expected to fall to 3.1%) from 4% in May.
- On a monthly basis, the U.S. consumer price index slowed to a weaker-than-expected 0.2%, from 0.1% in May.
- The core consumer price index (CPI), which excludes food and energy prices, slowed more than expected year-over-year to 4.8% from 5.3% in May.
- On a monthly basis, core CPI came in at 0.2% in June, against expectations for a rise of 0.3%.
While the data sent encouraging signals to the market, the optimism in the indicators does not necessarily imply an immediate detailed decision on rates as the Fed cautiously weighs the impact of its policy over time, given that rates have slowed faster than previously expected.
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USC economics professor Aris Protopadakis confirmed this in an exclusive statement to the Sky News Arab Economics website, in which he said a month or more of low inflation data “would not affect the Fed’s interest rate decision in the coming months”.
His explanation for this is that the core CPI is still above the 2% target, and “if the core inflation rate falls further, they (the Fed) will likely reassess at the last meeting of the year.”
While inflation continues to retreat, it may not be fast enough to prevent the Fed from resuming rate hikes at this meeting, especially given many other indicators including oil prices.
Proto Papadakis emphasized that the financial community has been exerting full pressure on the Fed to keep interest rates low to gain its own fiscal advantage.
These include many of the tech giants who tout that a “recession is coming” or that a recession is already in.
central europe
As for the European Central Bank, the rate hike of 25 basis points has been basically determined, and the focus of attention is mainly on the monetary policy direction of the post-summer meeting and the new indicators related to the inflation rate in the euro zone. The inflation rate in the euro zone fell better than expected, as follows:
- Consumer prices rose 5.5% in June after rising 6.1% in May, according to Eurostat.
- Food and beverage prices rose 11.7% in June, after rising 12.5% in May.
- Eurozone energy price inflation fell further into negative territory in May, falling 5.6% in June after falling 1.8% in May.
- Core inflation, which excludes volatile energy, food, alcohol and tobacco prices, rose accordingly to 5.4% in June from 5.3% in May.
Consumer prices are still above the ECB’s 2% target, so the market expects the ECB to continue raising interest rates at a new meeting.
According to Amy Verdon, founding director of Victoria University’s European Studies Program, in a statement to Sky Arabia News:
- The central bank is expected to approve a new rate hike at a new meeting, the same as the rate hike approved in mid-June, ie 25 basis points, taking into account recent price data.
- Markets then await the September meeting, where rate-related decisions and expectations will be shaped by incoming data and assessments of price stability and progress towards the 2% inflation target.
- And because the market believes that the direction of the ECB after the new meeting and whether it will stop the series of interest rate hikes after the July meeting or continue to raise interest rates at a slower pace is not very clear, so they believe that if there is no real sign that inflation is slowing significantly, then the ECB will also continue to raise interest rates after that.
Last month, the ECB defied instructions from the Federal Reserve and the Bank of Japan, which decided not to raise rates, but the Bank of Canada did.
A Bloomberg survey shows that the ECB plans to raise borrowing costs to a peak of 4% by next September, which would mean two rate hikes (a quarter of a percentage point each); the first at this July’s meeting.
Bank of Japan
As for the Bank of Japan, which will hold a monetary policy meeting on July 27-28, analysts surveyed by Bloomberg expect the central bank to keep its monetary policy tools unchanged at Friday’s meeting.
More than 80% of economists currently surveyed by Bloomberg believe the central bank will keep all monetary policy tools unchanged on Friday.
The rest expect the BOJ to expand its yield target again, or make a similar adjustment.
A previous poll showed about a third of respondents expected a change in July.
- Core consumer prices in the Japanese capital rose 3.3% year-on-year last month after rising 3.2% in May, official data showed.
- Inflation exceeded the Bank of Japan’s 2% target in June (15th consecutive month).
Mazen Salhab, chief market strategist for the Middle East and North Africa at BDSwiss, said in a statement to Sky News Arab Economics that the three main factors currently determining the direction of the Bank of Japan’s monetary policy are as follows:
- Inflation hit 3.3%, still far from the 2% target.
- Clearly, the BOJ is interested in continuing to keep the 10-year JGB yield curve above 0.5%.
- The Bank of Japan will not risk the appreciation of the yen, especially in terms of international trade; because Japan relies on exports, which are the backbone of its economy. There is also a correlation between persistent yen weakness and high exports.
He believes the BOJ will not risk raising interest rates as long as the currency of its biggest rival (China) weakens, as the dollar has gained 2% against the yen since the beginning of the year and 4% against the yuan.
As such, Sahab sees “no changes to its monetary policy expected from the BOJ,” explaining that “the upside for the BOJ is that its meeting is held after the Fed meeting, so a rate hike from the Fed, as expected, would eliminate the need for the BOJ to raise rates.”
He continued: “Unless high inflation occurs, the BoJ will not raise interest rates. Rising inflation will be a turning point for the BoJ’s policy.” He explained, “Currently rising energy prices make falling inflation in Japan a huge challenge, as is food, especially since inflation in Japan is largely dependent on rising energy prices, especially since Tokyo is the second-largest importer after China.”
The Bank of Japan kept interest rates unchanged at its last meeting in June, maintaining an accommodative monetary policy.
He said he had fixed short-term interest rates at -0.1%, in line with expectations, and made no changes to yield curve control, in line with officials’ view that inflation will slow in the coming months.
Earlier, Japanese Finance Minister Shunichi Suzuki pledged to take appropriate measures in the face of excessive yen weakness, which was seen as a sign that Japanese authorities may intervene to support the yen.