The Bank of England and the European Central Bank will likely increase interest rates again. But by how much?
Fresh inflationary data from the United Kingdom and the bcement Europe’s most important central banks’ decisions. Next week the Bank of England, the European Central Bank, and, on the other side of the Atlantic, the Federal Reserve will hold their monthly meetings.
On Wednesday, UK consumer prices data was released, revealing a better situation than expected. General inflation dropped more than expected to 7.9% annually.
In May, the UK was the only developed economy whose inflation rose from previous levels, sitting at a whopping 8.7%. The reading worried British economists that the previous 20 months of strong rate hikes were not enough.
British interest rates jumped from 0.1% to 5%, worsening an already stagnant economy.
Despite fresh data providing better news, core inflation remains high at 6.9%. Core inflation measures consumer prices without volatile products like food or energy. Indeed, analysts believe headline inflation is dropping because of lower energy prices than last year.
High core inflation signals a persistent problem, likely linked to the housing market and its ever-increasing prices. In the Eurozone, already gripped by recession since June, core inflation rose to 5.5%, Wednesday data showed.
The Eurozone’s inflationary jump was 0.1% higher than expected, confirming what we already knew about ECB intentions.
What will central banks do
Last week, markets gave a 50-point rate hike by the Bank of England a 66% chance. With fresh inflationary data, markets now put the likelihood of a 0.5% rate increase at 41%.
Instead, a smaller 0.25% increase is seen as more likely, even though the Bank of England has preferred higher interest rate hikes so far. The possibility of a 25 basis point increase is set at 59%.
This could be due to the fact that the UK economy is slowing down, and a high rate increase could further damage it. However, 100% of investors agree that a hike is coming in any case.
Similarly, the ECB meeting will probably give the same result, the market believes. Despite the recession in Germany and the Eurozone, core inflation is far higher than the 2% target.
ECB governor Christine Lagarde often publicly declared that fighting inflation was her top priority. The energy crisis has put a heavy toll on EU households, and inflation risks making it more challenging.
Even in the United States the Federal Reserve is considering another rate increase. Though rate hikes paused in June, the Fed announced many times that core inflation was too high to take chances.
By the end of summer, Western economies might collectively fall into recession. A bleak scenario looking into next winter.
