ECB to cross 2008 Rubicon with collapse-defying hike: Eco Week

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(Bloomberg) – Over the coming week, the European Central Bank will enter final territory in the run-up to the global financial crisis as it raises interest rates during what appears to be a recession.

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It was in July 2008, just as the euro area entered four quarters of contraction, that the Governing Council raised borrowing costs for the first time in more than a year, before reversing the trend shortly time after when US investment bank Lehman Brothers collapsed. caused unprecedented market turbulence.

This time, officials face far higher inflation, stoked by risks of a different order as the energy crisis caused by Russia’s war in Ukraine raises the cost of living and crushes economic growth.

As with central banks from Canada to Colombia likely to tighten policy, the ECB’s need to raise rates to keep consumer prices from spiraling out of control will keep policymakers focused, even if the risk of a collapse is closer than ever.

That’s why, even as many economists now believe a recession has begun in the euro region, they unanimously anticipate another massive 75 basis point hike on Thursday.

Memories of what is now seen as a policy mistake in 2008 may still haunt the ECB, especially as rates go even higher and begin to constrain growth in due course. Such a prospect is likely to make future hiking decisions in 2023 more controversial, although this one won’t be.

What Bloomberg Economics says:

“The ECB will focus on the extremely high inflation rate and will continue to raise interest rates as the economy weakens. We expect another 75 basis point hike in October and the deposit rate to end the tightening cycle at 2.25% in February.”

–For a full analysis, click here

Elsewhere, gross domestic product reports could show a return to growth in the United States, a contraction in Germany and a slowdown in France. The selection of a new UK Prime Minister and likely unchanged rate decisions in Japan, Russia and Brazil will be among the other highlights.

Click here to see what happened last week and below is our summary of what is happening in the global economy.

United States and Canada

The calendar includes the US government’s first estimate of third-quarter growth, as well as personal consumption, income and inflation figures for September.

GDP may have grown at an annualized rate of 2.3% in the July-September period after contracting in the first and second quarters, according to economists polled by The Bloomberg Project. The Atlanta Fed’s GDPNow estimate puts third-quarter growth at 2.9%.

Details of the report will provide clues to the level of consumer and business demand at a time of heightened inflationary pressures and amid the Fed’s string of huge rate hikes. Among other things, aggressive policy tightening likely led to a collapse in residential investment in the third quarter.

The Atlanta Fed estimates personal consumption grew at a 1.2% pace in the quarter, which would be the slowest advance since the early months of the coronavirus pandemic. However, business equipment spending is expected to rebound after a lull in the previous three months.

On Friday, September’s income and expenditure report will indicate what momentum, if any, the economy has at the start of the fourth quarter. The data is also expected to show a recovery in a key inflation measure watched by Fed officials after a similar measure accelerated to a 40-year high.

Fed policymakers will be in a blackout period ahead of their Nov. 1-2 meeting, when they are expected to raise the benchmark benchmark rate by 75 basis points for the fourth consecutive time.

Further north, a faster-than-expected inflation reading has left economists divided on how aggressively the Bank of Canada will raise rates on Wednesday. Some are sticking with forecasts of a half-point move, while others are anticipating a 75 basis point increase, in line with financial market expectations.

If officials in Ottawa opted for the broader option, it would take the benchmark overnight lending rate to 4% for the first time since the start of 2008.

Asia

China will unveil a new leadership team this weekend, with investors keeping a close eye on what that could mean for economic policy. They are also on the lookout for the delayed release of China’s third-quarter GDP figures and September readings on retail sales, investment, industrial production and the struggling housing market.

While Tokyo is still closely watching the yen, the Bank of Japan is meeting to decide its policy. Governor Haruhiko Kuroda insists he will stick to the lowest rates to spur the virtuous form of inflation he has sought for nearly a decade, even as markets keep pressure on the currency and the BOJ’s yield cap.

On Tuesday, Australian Treasurer Jim Chalmers unveiled a budget update – his first since Labor’s election victory. The next day, the latest price data from Australia is expected to show headline inflation at its fastest pace since 1990.

South Korea released GDP figures on Thursday which are expected to show slowing growth. And in Southeast Asia, Singapore releases its latest inflation report which is expected to show price gains remain at their highest level in 14 years, while the central bank of the Philippines will be watched as it seeks to defend the currency against further losses.

Europe, Middle East, Africa

The UK’s ruling Conservative Party will rush into a leadership race next week following the resignation of Liz Truss as Prime Minister following a botched budget that has caused untold turmoil on the financial markets.

Hastily announced rules mean a result can emerge as early as Monday – on the basis that in a narrow field of two candidates, whoever has the least support will face pressure to step down and be done with it all.

Whoever wins will inherit an economy struggling to rid itself of long-term decline. A much-anticipated budget plan may attempt to address this issue, and events in the coming days will determine whether the proposal is announced on October 31 as scheduled or pushed back.

As ECB policymakers focus on their rate decision on Thursday, economic growth data from across the Eurozone will also attract attention.

On Monday, purchasing manager surveys for October are due, while on Friday third-quarter GDP will be released in three major countries. Germany is expected to show a contraction while the French and Spanish economies have probably slowed markedly.

Sweden, which is now facing a real estate crisis as severe as during the financial crisis, probably also saw its GDP contract during the quarter. These data are due the same day.

Also on Friday, Russian policymakers are expected to suspend easing as inflationary pressures mount and growing uncertainty surrounding Ukraine’s invasion hurts confidence.

Elsewhere in the region, South African Finance Minister Enoch Godongwana will present his second medium-term budget on Wednesday, with better-than-expected tax collection and higher nominal GDP likely to lead to improvements in key metrics.

He will also provide details of the Treasury’s long-awaited plan to take over some of the 413 billion rand ($22.8 billion) debt of state-owned Eskom Holdings SOC Ltd.

On the same day, the Namibian central bank will probably raise its rates by 75 basis points to preserve the peg of its currency to the rand and control inflation.

Latin America

A cycle of record central bank tightening and slowing growth finally appear to be getting the better of Mexican consumer prices, according to data due Monday. The headlines likely peaked, finally, although the core readings may have risen 8.29%.

In a busy week for Brazil, analysts expect consumer price increases to slow for a fifth month through mid-October, with the broadest measure of inflation slightly above the 7%.

With that data in hand, the central bank will almost certainly hold its key rate at 13.75% for a second meeting on Wednesday. The bank has signaled its intention to hold the Selic benchmark higher for longer. The figures for unemployment and the creation of formal jobs are also there.

Minutes from the Banco Central de Chile’s Oct. 12 meeting on Thursday may offer further guidance after policymakers ended a record bull cycle at 11.25% and said they would maintain the rate there “as long as needed”. Chile also reports data on labour, manufacturing, copper production and retail sales.

At the end of the week, Colombia’s Banco de la Republica is expected to encounter inflation at 11.44% and still rising, with the peso near record highs and the president pleading with investors to keep their money in the country. Analysts expect a 100 basis point rise to 11% on Friday with further tightening ahead.

–With help from Robert Jameson, Vince Golle, Benjamin Harvey, Malcolm Scott and Theophilos Argitis.

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