The European Central Bank (ECB) is finally about to join the global bandwagon of monetary policy tightening, spurred into action by repeated record highs in inflation.
Almost three months since the US Federal Reserve delivered a first interest-rate hike, its euro-zone counterpart will this week announce an end to bond purchases and formally begin the countdown to an increase in borrowing costs in July.
The ECB has hesitated to remove stimulus while gauging the fallout from the war raging just over the frontier of its currency area in Ukraine.
By contrast, most major central banks are now further down the road with tightening, and some are even ratcheting up the pace. The Fed doubled the speed of rate hikes last month with a half-point increase, and policy makers in Australia on Tuesday and India on Wednesday could follow suit with faster moves too.
Against that backdrop and with euro-zone inflation now at 8.1%, there’s a clear consensus at the ECB on the need to get started. The argument now within the Governing Council centres on whether quarter-point increases are enough, and on how high to ultimately bring rates next year.
Austrian central bank Governor Robert Holzmann says anything less than a half-point move “risks being seen as soft,” and colleagues from the Netherlands, Slovakia and Latvia have openly called for such an increment to at least be considered.
“The majority of the Governing Council seems to be in support of a smaller move, but market participants will be closely watching remarks after the ECB’s meeting on June 9 for hints that the hawks are once more gaining the upper hand,” say David Powell and Jamie Rush at Bloomberg.
Forecasters at Deutsche Bank and Bank of America now reckon that will materialise, but most economists currently assume the hawks’ views won’t prevail.
ECB President Christine Lagarde is likely to face questioning on that debate at her press conference on Thursday after the meeting. She will also unveil crucial new forecasts that informed the decision, with projections that may invite comparison with the OECD’s latest global outlook due the previous day.
Elsewhere, central banks from Chile to Poland will probably continue hiking too, Russian policy makers may deliver a rate cut, and US consumer-price data is likely to show a monthly acceleration.
In the US, the May consumer price index takes top billing in an otherwise quiet week for economic data.
Fed officials will observe a blackout period ahead of their June 14-15 policy meeting.
The government’s CPI report on Friday is expected to show inflation accelerated on a month-to-month basis, due in part to record gasoline prices. Excluding fuel and food, the core measure probably posted another sizeable advance that indicates sustained price pressures.
The projected monthly gains are seen keeping annual inflation elevated. Economists are calling for an 8.3% year-over-year increase in the overall CPI and a 5.9% gain in the core measure. The Reserve Bank of Australia meets on Tuesday with another rate hike anticipated as inflation continues to outstrip forecasts and the economy holds up better than forecast.
The question is by how much, with the official cash rate out of sync with its usual quarter-point settings.
Australian consumer prices have accelerated from the 5.1% recorded in the first three months, Treasurer Jim Chalmers said yesterday.
“It’s now really clear that the inflation challenge that Australians are facing is worse,” Chalmers told News Corp, saying he’ll likely raise the forecast in next month’s economic statement to parliament. “People should anticipate that it will be higher than it is now. Significantly higher.”
India’s central bank is also expected to raise rates again on Wednesday, while the Bank of Thailand is likely to buck the hiking trend.
Japan and South Korea will revise their GDP figures for the first quarter on Wednesday. Japanese household spending and wage figures for April will show how the rebound from a first-quarter contraction is faring, with soaring energy prices and a weak yen anticipated to limit the release of pent-up demand.
Remarks by Bank of Japan Governor Haruhiko Kuroda during the week will be closely parsed for any signs of change as prices keep rising and the yen shows renewed weakness.
Chinese trade data on Thursday and inflation data on Friday will be closely scrutinised after purchasing managers reports for May pointed to some improvement as lockdowns eased.
While the ECB decision on Thursday will take centre stage, manufacturing data from around the euro zone may also attract investor attention.
Both German factory orders on Tuesday and industrial production the next day are likely to show improvement at the start of the second quarter, picking up after disruptions caused by supply bottlenecks. Spanish output on Tuesday is also expected to rise, though Italian factory data on Friday may have fallen.
Consumer-price data will draw focus elsewhere in Europe. In the Czech Republic, economists anticipate inflation to surge above 15%, posing a challenge to the incoming central bank governor who plans to halt aggressive rate hikes.
Meanwhile Norwegian officials will watch for an acceleration in annual price increases too, with a reading of 5.6% expected.
Among central bank decisions due, Polish policy makers will probably raise rates for the ninth straight month on Wednesday, and their Serbian counterparts may consider additional tightening too the next day.
Russia is going the other way. Governor Elvira Nabiullina is expected to cut rates further on Friday, dismantling more of the economic defences she established after sanctions were imposed on Russia following its invasion of Ukraine.
The bank already delivered its third rate reduction in just over a month on May 26 at an extraordinary meeting, reaching 11%.
Nabiullina, who more than doubled the key rate to 20% after the invasion began in late February, said after the last cut that she saw further room for easing at meetings ahead.
Look for a bit of history out of Chile on Tuesday where the central bank is expected to raise its key rate to a record high 9% to extend its sharpest and longest-ever tightening cycle.