Will the ECB unveil its new “anti-fragmentation” tool?

Will the ECB shed light on its “anti-fragmentation” tool?

The European Central Bank has widely announced its intention to raise interest rates this month for the first time in more than a decade, as it battles record eurozone inflation that has triggered worsening of the cost of living crisis.

Economists expect eurozone borrowing costs to rise by 0.25 percentage points after Thursday’s monetary policy meeting, taking the ECB’s main deposit rate to minus 0, 25%.

The central bank also signaled that a bigger hike may be needed in September unless the inflation picture improves significantly. Eurozone consumer price growth reached 8.6% in the year to June.

But elsewhere, ratemakers have acted more aggressively in recent weeks, with the US Federal Reserve, the world’s most influential central bank, raising borrowing costs by 0.75 percentage points in June, the most since 1994.

A stronger Fed stance also supported the dollar, pushing the euro to parity with the US currency this month for the first time in two decades.

The challenge for the ECB is to turn the political screw in the euro zone without compressing its most indebted economies such as Italy and Greece.

Goldman Sachs analysts say a quarter-point hike remains more likely than a half-point move – not just because the ECB Governing Council heavily guided the move, but also because that “growth prospects have weakened and the ECB has historically not offered hikes with a discount of less than 70%”.

For now, market participants will be watching closely for further clues to the ECB’s ‘anti-fragmentation’ tool, aimed at limiting the divergence in borrowing costs between the strongest and weakest countries in the world. block.

Frederik Ducrozet, global macro strategist at Swiss wealth manager Pictet Wealth Management, said he expected the tool to be “bold, flexible and credible enough to prevent a sustained widening of peripheral bond spreads over the medium term. “.

The spread between Italian and German benchmark 10-year bond yields hit its highest level in a month on Friday, indicating investors were demanding a higher premium for holding riskier eurozone debt. Harriet Clarfelt

Has inflation in the UK accelerated?

Economists expect no respite for UK inflation when June data is released on Wednesday.

The headline consumer price index is expected to have climbed to 9.3% from a 40-year high of 9.1% in May, according to a Reuters poll.

Rising fuel prices were a key driver of this further acceleration, said Investec economist Ellie Henderson, reflecting another push at the pumps in June. She added that plane tickets would likely have increased due to these higher fuel costs and high demand after two years of restricted travel. The weak pound and the war in Ukraine would also have led to continued pressure on food prices.

While the inflation outlook is dominated by energy prices, political events are adding uncertainty to the domestic picture as many of the frontrunners to replace current UK Prime Minister Boris Johnson – the former chancellor Rishi Sunak aside – have promised sweeping tax cuts as part of their leadership campaign. “Such tax cuts can help stimulate the economy, but also risk creating more entrenched underlying inflation,” Henderson said.

High inflation and a tight labor market could add to expectations that the Bank of England will raise interest rates by 0.5 percentage points at its next meeting on August 4. Markets are pricing in a 79% chance of such an increase, marking a step up from increases of 0.25 percentage points in the previous five BoE meetings. Valentina Romei

Will the BoJ tighten policy at its meeting this week?

Consumer price index inflation in Japan has slowly climbed to 2.5% from negative rates seen last year. But it remains well below known levels elsewhere in the world.

That gives the Bank of Japan enough headroom to keep its ultra-loose overnight interest rate at -0.1% at its two-day policy meeting on Wednesday and Thursday. And while the yen has set a series of new 24-year lows in recent weeks, as investors move money into markets with higher interest rates, and is now trading near ¥139 per month. dollar, the BoJ showed little appetite to change tack.

Analysts also expect the central bank to stick to its 0.25% yield target for its 10-year government bond, which has recently come under pressure as traders sought to test the bond. BoJ’s commitment to its accommodative policy.

“The BoJ will not adjust policy due to market pressure,” analysts at UBS, the Swiss bank, wrote in a note, adding that pressure on bonds had eased as yields fell. Americans.

In their base case, analysts at Morgan Stanley MUFG do not anticipate any change to the BoJ’s yield control policy until well into next year. They do not expect the short-term policy rate to rise in 2023. William Langley

Comments are closed.