The European Central Bank is widely expected to keep interest rates on hold at its meeting in Frankfurt next week, when investors will watch closely for signals about the likely timing and scale of future moves.
Markets are betting on another rate cut in September, pricing in a roughly 85 per cent chance of the ECB reducing its benchmark deposit rate by 0.25 percentage points to 3.5 per cent.
However, policymakers seem determined to keep their options open, unlike earlier this year when they clearly signalled rate cuts would start in June.
The more hawkish rate-setters point out that annual wage growth of about 5 per cent and services inflation above 4 per cent are reasons to be cautious. They also say unemployment at a record low of 6.4 per cent means there is no need to rush further cuts.
“The ECB wants to retain full optionality on when and how much to cut,” said Mark Wall, chief European economist at Deutsche Bank. “The hawks need more convincing that wage inflation is turning and services inflation is slowing before cutting rates again.”
But doves say the latest data shows the recent pick-up in Eurozone growth is already losing steam. They also point to profit margins starting to shrink as a sign that companies are absorbing higher labour costs rather than passing them on to customers.
ECB president Christine Lagarde summed up its cautious approach this month by saying: “The strong labour market means that we can take time to gather new information, but we also need to be mindful of the fact that the growth outlook remains uncertain.” Martin Arnold
How quickly are UK inflationary pressures easing?
Investors will be closely watching upcoming UK inflation and wage data for indications of whether the Bank of England will start cutting interest rates from their 16-year high of 5.25 per cent in August or September.
Markets are almost equally split over whether the first rate cut will come on August 1. Signs that underlying price pressures are still strong could support the case for keeping rates on hold for longer, particularly as the economy is recovering faster than expected from the stagnation of the last two years.
Economists polled by Reuters forecast that annual headline and core inflation, which strips out food and energy, will be unchanged from the previous month at 2 per cent and 3.5 per cent, respectively.
They also forecast earnings growth will slow to an annual rate of 5.7 per cent in the three months to May, down from 5.9 per cent in the previous period. However, a key measure of underlying price pressure is the path of services inflation, which has remained particularly sticky at 5.7 per cent in May.
Rob Wood, an economist at consultancy Pantheon Macroeconomics, forecast that services inflation would slow only slightly to 5.6 per cent, well above the Monetary Policy Committee’s forecast of 5.1 per cent. He argued that services inflation reflected still-elevated wage growth, particularly April’s 9.8 per cent minimum wage increase feeding through to prices.
“Accordingly, we expect prices in accommodation, housing, recreation and culture to rise more than during a typical June,” said Wood.
However, higher than forecast services inflation in May “did not alter significantly the disinflationary trajectory that the economy was on”, according to the latest BoE minutes.
The start of the Euro 2024 football tournament and Taylor Swift’s concert tour could also have resulted in a temporary boost in prices, said economists. Valentina Romei
What will retail sales reveal about the health of the US consumer?
US retail sales data is set to offer insight into the health of the consumer at a time when the highest interest rates in decades are putting pressure on the weakest parts of the economy.
The Census Bureau on Tuesday is expected to report no increase in overall retail sales in June from the prior month after an increase in May. Excluding the car sector, which tends to be more volatile, retail sales are expected to have risen 0.1 per cent.
If retail sales come in below expectations, the data, in combination with recent evidence of a slowdown in the labour market and weaker inflation, could help persuade the Federal Reserve to begin cutting interest rates in September.
“We look for retail sales to notably retreat in June on the back of large declines in auto and gas sales,” wrote analysts at TD Securities. “Separately, tame June inflation and a softening labour market are opening the door for a September rate cut. Fedspeak next week, led by [chair Jay] Powell on Monday, could offer indication that Fed officials are also reaching that conclusion.”
Expectations of a rate cut rose this week in the wake of weaker than forecast inflation data. Futures markets are now fully pricing in a reduction in September. Kate Duguid
