The latest Reuters poll reveals that economists are predicting a slight decrease in headline Year-over-Year (YoY) inflation, with estimates pointing to a +2.6% rate, down from +2.9% in July. On the other hand, core inflation, which excludes energy and food components, is expected to remain steady at +3.2%. This marks a continuation of the trend of softened inflation data over the past few months. Month-over-Month (MoM), both headline and core inflation are anticipated to increase by +0.2%, mirroring the figures from July.
The debate over whether the Federal Reserve will implement a 25 or 50 basis point cut in interest rates is ongoing. Despite the recent softer inflation numbers and a decrease in job growth for August, the overall economic indicators do not suggest an imminent recession. Unemployment has reduced to 4.2%, and real GDP is maintaining a healthy annualized growth rate of +3.0% in Q2 2024. As a result, it is unlikely that the Fed will opt for a larger 50 basis point reduction in rates at this point in time.
The ECB is expected to lower all three benchmark rates at its upcoming meeting, following a previous 25 basis point rate reduction in June. With headline inflation nearing the central bank’s 2.0% target, markets are projecting a 25 basis point cut this week and potentially another cut in December. The overall expectation is for a total reduction of 63 basis points by the end of the year. While headline inflation in the Euro area dropped to +2.2% in August, core inflation remains a concern. Despite a decrease in the YoY core inflation rate to +2.8%, down from +2.9% in July, the average rate since the start of the year has been +2.9%. This, coupled with persistent services inflation and elevated wage growth, is likely to limit the ECB from implementing more than two rate hikes this year.
In addition to the rate cuts, the ECB will also unveil its latest economic forecasts. Analysts are anticipating downward revisions in headline inflation, wages, and GDP growth, which could potentially weigh on the value of the Euro (EUR). Conversely, core inflation may see an upward revision. The central bank’s forward guidance on future rate reductions will be closely watched, although expectations are not high for significant commentary.
Overall, the recent inflation data has significant implications for central bank monetary policy decisions. While softer inflation may warrant rate cuts, other economic factors are still holding strong, making the path forward for central banks a delicate balancing act. Market participants will be closely monitoring the central banks’ moves in the coming months to gauge the overall economic outlook.
Leave a Reply