The ECB is on track to raise rates next week
Core inflation in the euro area has been stuck at about 2½%, above the ECB's 2% target.
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The ECB still seems likely to raise rates by 25bp next week given above-target core inflation and ongoing upside risks to inflation.
President Lagarde said after the July ECB policy meeting that, “some governors … asked … whether we should not consider a hike [today]”, with the Governing Council “unanimously decid[ing] that we … be very attentive in the next few weeks to the development of the [Middle East] situation and to the [key inflation, GDP and survey] data that we will be receiving … [because] we will make our decision in September”.
With GDP in line with ECB forecasts, historically low unemployment matching the estimated NAIRU, ongoing upside risks from the Iran war, and persistently above-target core inflation, it still seems likely that the ECB will resume raising rates at the 9-10 September policy meeting, with policy rules pointing to two rate rises this year to take the policy rate from 2¼% to 2¾%.
On the latest inflation numbers, the euro area core CPI rose by 0.2% for the third month in a row in July on CCI's seasonal adjustment. Annual inflation has edged up from a low of 2.2% in January and has held steady at 2.4% over the past few months. Inflation to date has been close to the ECB’s central case, which forecasts inflation will peak at about 2.7% by early next year.
Euro area services inflation unexpectedly eased in July, while goods inflation has picked up recently. Some of the relative strength in goods prices likely reflects ongoing supply-side pressure from the Iran war, as well as upward pressure from strongly-rising world tech prices.
- Core services prices barely grew in July, up 0.1%, which was the smallest increase since May last year. Annual inflation is still well above the 2% target, but eased to 3.1%, the best result since April.
- Core goods prices – which historically increase at a glacial pace in the euro area – are rising at about 0.1% per month, almost rounding up to 0.2% in July. Goods prices are up 1.1% over the past year, which is the fastest ex-COVID growth since 2012.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 65 executives and over $20 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment...
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