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Hello. Mari here, reaching out to you from London, where the European Central Bank’s choice to maintain rates was the highlight in a busy week for central banks.
Key Points from the Previous Week
The ECB’s attention in Frankfurt on Thursday was on keeping options open and clarifying its thought process regarding recent higher-than-expected inflation and wage growth data. President Christine Lagarde mentioned that the bank would adopt a wait-and-see approach towards the September meeting, being prepared to cut rates without making any promises. The MPR team predicts that if the data remains relatively stable over the summer, the ECB will proceed with a rate cut in September. France’s central bank governor agrees with this viewpoint.
In the not-so-bright UK, the recent data has been somewhat conflicting and challenging to interpret, although it has not changed our anticipation of an August rate cut.
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Initially, UK services inflation, which was reported on Wednesday, continues to exceed expectations, failing to fully reassure the Monetary Policy Committee members at the Bank of England who are seeking solid evidence of disinflation before implementing policy changes, as per Elettra Ardissino. The positive surprise in June was limited to fluctuating hotel prices, so the BoE might decide to overlook this disappointment.
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Just a day later, UK wage information showed signs of moderation, providing BoE policymakers with the necessary reassurance to proceed with a rate cut in August without solely relying on forecasts. Prior to this data, the meeting seemed uncertain, but the MPR team believes that the labor market statistics should be adequate to convince hesitant members.
In the US, the Federal Reserve’s future actions have become more evident, with speeches from officials and data reinforcing expectations of an upcoming rate cut in September.
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At the start of the week, a optimistic Jay Powell addressed the Economic Club of Washington DC, discussing the country’s annual inflation rate, which is nearing the targeted 2 percent. According to the head of the central bank, recent data indicates a favorable pace of price growth.
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Although Powell did not specify the timing of the rate cut, two senior officials indicated on Wednesday that a rate reduction was on the horizon. Fed governor Christopher Waller made it clear that this would likely happen in September and not during the bank’s meeting at the end of July.
In Japan, underlying inflation remained steady, raising the possibility that the Bank of Japan may opt for a rate hike at its upcoming meeting towards the end of the month. However, we believe that an autumn hike is more probable when there is stronger evidence of sustained inflation.
Featured Chart of the Week
I recommend reading this article by Joel Suss, which delves into how a group of superforecasters — individuals with a knack for predicting accurately — have consistently outperformed the market in forecasting the Fed’s next steps.
Upcoming Central Banking Events
The upcoming week will be less eventful for central bank observers.
Federal Reserve
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PCE Inflation: The Federal Reserve’s preferred inflation metric, PCE, will be released on Friday, following earlier CPI figures that fell below expectations. If the PCE aligns with those figures, as anticipated, it will bolster confidence in the Fed’s decision to ease monetary policy in September.
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GDP: After a lower-than-expected growth rate in the first quarter of 2024, and recent findings from the beige book indicating a slowdown in economic activity, a modest recovery is expected next week.