ECB Is Poised to Cut Rates Again in Warm-Up Act for the Fed

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(Bloomberg) — The European Central Bank is likely to cut interest rates on Thursday in preparation for a U.S. move the following week, as the global monetary cycle tilts toward more synchronized easing.

Eurozone officials have signaled they will deliver a second cut in borrowing costs, following a move in July, which investors will be scrutinizing for policymakers’ intentions to take any further steps later this year. At least one more cut is likely in 2024.

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Along with the Bank of Canada’s Sept. 4 interest rate move, the timing of the ECB meeting — days before the Fed’s expected initial cut on Sept. 18 — underscores how major advanced economies are now shifting more in line with officials’ shift to supporting economic growth now that they have judged inflation risks have faded.

In the euro area, the easing of key wage growth measures in the second quarter is likely to help encourage policymakers.

Similarly, Wednesday’s U.S. consumer price report could provide Federal Reserve officials with reassurance that inflation pressures are stabilizing, following Friday’s data showing U.S. employment fell short of expectations.

For investors, the question looming over this month’s meetings is the extent to which such rate cuts might herald a deeper easing cycle that could not only remove constraints on major economies, but also begin to stimulate them.

What Bloomberg Economics says:

“We expect the ECB to cut interest rates by another 25 basis points in December. But high wage growth and persistent inflation in service prices would prompt the Governing Council to refrain from committing to this in advance.”

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—David Powell, Chief Economist. For the full analysis, click here.

Growth prospects will be in focus when European Central Bank President Christine Lagarde speaks to reporters on Thursday — especially in light of just-released data showing that the second-quarter expansion was weaker than initially reported.

ECB Governing Council officials are thought to be more comfortable with changing interest rates at meetings like the next one, when they are ready to present new quarterly forecasts. That would make a rate cut in December more likely than at their next meeting on Oct. 17.

Elsewhere this week, Chinese inflation data, UK wages figures and interest rate decisions from Pakistan to Peru were among the highlights.

Click here to see what happened last week, and here’s our summary of what’s coming in the global economy.

United States and Canada

Fed officials are entering a period of public blackout ahead of their meeting. Earlier, Governor Christopher Waller said after Friday’s jobs report that it was important to start cutting interest rates. Waller also indicated he was “open-minded” about the possibility of a deeper cut. “The current batch of data no longer requires patience, it requires action,” he said.

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The labor market is top of mind for Fed policymakers as price pressures slow. The August CPI report is expected to show the core inflation measure, which excludes food and energy, rose 0.2% for a second month. On a year-over-year basis, core CPI may have risen 3.2%, matching July’s annual figure which was the smallest since 2021.

Other U.S. data due next week include August producer prices, weekly jobless claims and the University of Michigan’s preliminary consumer sentiment survey for September.

In London, Bank of Canada Governor Tiff Macklem will speak about shifts in global trade and investment from a Canadian perspective and take questions from reporters. Meanwhile, national balance sheet data will shed light on household net worth and debt-to-income ratios in the second quarter.

• For more information, read the full Bloomberg Economics report on the week ahead for the United States.

Asia

China takes center stage, starting with data due on Monday that is expected to highlight continued fragility in domestic demand.

Consumer inflation is expected to rise slightly, to a paltry 0.7%, while factory price declines are expected to deepen.

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Data out over the weekend could add to the gloom, with industrial output, retail sales and fixed-asset investment likely to slow in August, while property investment is expected to fall at a double-digit rate for the fourth straight month.

Elsewhere, expectations for Japan’s economic recovery in the second quarter may be revised slightly higher after taking into account strong capital investment data during that period.

India’s August inflation data, due on Thursday, could prompt the Reserve Bank of India to cut interest rates in October, according to Bloomberg Economics, which expects price growth to slow for a second month.

Trade figures are due out during the week from China, India, Taiwan and the Philippines, while Australia will get consumer and business confidence indicators on Tuesday.

On the monetary front, the State Bank of Pakistan is expected to cut benchmark interest rates for the third time in a row on Thursday. Its counterpart in Uzbekistan will also make its monetary policy decision on the same day.

• For more information, read Bloomberg Economics’ full report on the week ahead in Asia.

Europe, Middle East and Africa

UK data could grab investors’ attention. Tuesday’s wage figures are likely to show weaker wage pressures, although the annual pace of growth remains more than double the Bank of England’s 2% inflation target.

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Economists expect monthly gross domestic product on Wednesday to show a modest increase in July, suggesting a tepid start to the third quarter. The Bank of England is due to release its latest survey of inflation expectations on Friday.

Moving to the eurozone, industrial production figures from Italy, Spain and the region as a whole will also give an indication of the state of the economy there at the start of the second half of the year. Based on the performance of Germany and France, in data released on Friday, the broader economy is likely to be on a weaker footing.

In Germany itself, Finance Minister Christian Lindner will present the country’s 2025 budget to parliament on Tuesday, followed by statements the next day by Chancellor Olaf Scholz and other government ministers.

Elsewhere on the continent, inflation figures in Norway and the Czech Republic on Tuesday, and in Sweden on Thursday, will be closely watched as central bank policymakers assess the strength of ongoing price pressures.

Moving south, traders will be watching Egypt on Tuesday to see if inflation has slowed for a sixth straight month. It hit 36% in February but has since fallen to below 26%, largely due to a massive international bailout.

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Similarly, a report on inflation expectations on Thursday will provide information for policymakers at the South African Reserve Bank, which uses two years’ worth of figures to guide its decision-making. A decline toward the 4.5% midpoint, where the central bank prefers to hold rates, could add momentum to a first rate cut since the height of the pandemic.

In addition to the ECB, a number of other interest rate decisions are due:

• Serbia’s National Bank is likely to decide on Thursday to keep interest rates at 6% after inflation rose in July for the first time in more than a year.
• The next day, attention will focus on whether the Bank of Russia will continue to tighten monetary policy after raising borrowing costs by 200 basis points in July. Data due on Wednesday could show that inflation there has passed its annual peak.

Finally, the International Monetary Fund is due to complete a review of Ukraine’s economy and finances next week, and will announce whether the lender’s board will approve the next tranche of a $15.6 billion loan to the war-torn country.

• For more information, read next week’s full Bloomberg Economics report for Europe, the Middle East and Africa.

latin america

Latin America’s three largest economies are due to release consumer price data in August as the region’s central bankers work to recalibrate their monetary policy.

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Mexico’s National Statistics Institute is likely to announce on Monday that inflation fell to 5.05% from 5.57% the previous month. The cost of living in the country has been rising due to higher prices for services, fruits and vegetables in recent months.

However, the expected slowdown now will give the central bank more room to consider another interest rate cut later this month to support the weak economy.

The next day, Brazil is expected to report that inflation has eased below the central bank’s 4.5% ceiling. Any decline is expected to provide limited relief as policymakers face pressure to raise borrowing costs in September due to price risks including higher public spending, strong economic growth and a weaker currency.

Finally, Argentina will release its data on Wednesday as President Javier Milei’s administration boasts of progress in efforts to tame the cost of living.

Monthly price increases have already slowed from 25.5% in December, when Meli’s government took office, to 4% in July. Annual inflation is still well above 200%.

• For more information, read Bloomberg Economics’ full report on the week ahead for Latin America.

—With assistance from Matthew Malinowski, Brian Fowler, Laura DeHillon Kane, Monique Vanek, Paul Wallace, and Tony Halpin.

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