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Hello. Mari here, writing to you from London, where the European Central Bank’s decision to hold rates was the highlight in a busy week for central banks.
Highlights of the past week
The ECB’s focus in Frankfurt on Thursday was on keeping options open and explaining its thinking about recent higher-than-expected inflation and wage growth data. President Christine Lagarde said the bank would take a wait-and-see approach towards the September meeting, preparing to cut without giving any guarantees. The MPR team believes that as long as the data is reasonably benign over the summer, the ECB will cut again in September. France’s central bank governor says this is a reasonable view to take.
In not-so-sunny Britain, the incoming data has been rather contradictory and difficult to interpret, but not enough to change our view that an August cut is coming.
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First, UK services inflation, which came in on Wednesday, continues to run far hotter than expected, somewhat failing to reassure the Monetary Policy Committee members at the Bank of England who are looking for solid evidence of disinflation before easing policy, writes Elettra Ardissino. The upside surprise in June was limited to volatile hotel prices so the BoE might choose to look through the disappointment here.
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Just 24 hours later, UK wage data displayed strong signs of moderation, allowing BoE policymakers to cut in August without basing their decision entirely on forecasts. Before this data, the meeting had all the makings for a toss-up, but the MPR team thinks the labour market data should be sufficient to reassure wavering members.
Over in the US the outlook for the Federal Reserve has become much clearer, with speeches from officials and data underpinning expectations of the first rate cut coming in September.
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On Monday, a cheerful Jay Powell took to the seats at the Economic Club of Washington DC, as Chris Giles writes, to chat about the country’s annual inflation rate, which is approaching his target of 2 per cent. According to the central bank’s boss, recent data suggests a “pretty good pace” of price growth.
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While Powell did not comment on the specific timing of any cut, two of his top officials told central bank watchers on Wednesday that an interest rate cut was coming closer. Fed governor Christopher Waller made it clear that meant September and absolutely not at the bank’s meeting at the end of July.
In Japan underlying inflation held up, raising the possibility that the Bank of Japan decides to raise rates at its meeting towards the end of the month. On balance we think that is still less likely than an autumn hike when the evidence of persistence will be stronger.
Chart of the week
You should check out this piece by Joel Suss, which examines how a group of superforecasters — a group of laypeople with special talent for forecasting — has been consistently better than the market in predicting the Fed’s next move.
Next week’s central banking events
Next week will be calmer for central bank watchers.
Federal Reserve
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PCE inflation: The Federal Reserve’s preferred gauge for inflation, PCE, comes in on Friday, after CPI figures earlier this month fell faster than forecast. As long as PCE is in line with those figures, and everyone expects so, the data will boost confidence that the Fed will ease policy in September.
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GDP: After the US economy grew less than expected in the first quarter of 2024 — and the beige book’s findings this week reinforced that economic activity is slowing — we are expecting a bit of a recovery next week.
