ECB to Cross 2008 Rubicon With Hike Defying Slump Risk: Eco Week

(Bloomberg) — In the coming week, the European Central Bank will enter territory it last visited 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 eurozone entered four quarters of contraction, that the Governing Council raised borrowing costs for the first time in over a year, only to reverse course shortly after when the investment bank American Lehman Brothers collapsed. inflicted unprecedented turbulence on the market.

This time, officials face much higher inflation, fueled by risks of a different order as the energy crisis spurred by Russia’s war in Ukraine drives up the cost of living and crushes economic growth.

As with central banks from Canada to Colombia likely to tighten policies, the ECB’s need to raise rates to prevent consumer prices from spiraling out of control will keep policymakers focused, even as the risk of a fall is coming more than ever.

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

Memories of what is now perceived as a policy mistake in 2008 could still haunt the ECB, especially when rates rise further and begin to restrict growth in due course. Such a prospect is likely to make future walk decisions in 2023 more contentious, even if this one won’t be.

What Bloomberg economics says:

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

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Elsewhere, gross domestic product reports may show a return to growth in the US, 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 other highlights.

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

United States and Canada

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

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

Details in the report will provide clues about the level of demand from consumers and businesses at a time of heightened inflationary pressures and amid the Federal Reserve’s series of huge rate hikes. Among other things, the aggressive policy tightening likely led to the collapse of residential investment in the third quarter.

The Atlanta Fed estimates that personal consumption grew at a 1.2% pace in the quarter, which would be the slowest growth since the early months of the coronavirus pandemic. However, business outlays for equipment are seen to pick up after a lull in the previous three months.

Friday’s September revenue and spending report will indicate how much of a boost, if any, the economy had entering the fourth quarter. The data is also projected to show a rebound in a key inflation measure watched by Fed officials after a similar metric accelerated to a 40-year high.

Fed policymakers will be in a lockdown period ahead of their November 1-2 meeting, where they are expected to raise the benchmark interest rate by 75 basis points for the fourth time in a row.

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

If Ottawa officials go with the larger option, that would bring the benchmark overnight lending rate to 4% for the first time since early 2008.

Asia

China will unveil a new leadership team over the weekend, with investors closely watching what that could mean for economic policy. They also keep an eye on the delayed release of China’s third-quarter GDP figures and September readings on retail sales, investment, industrial production and the ailing real estate market.

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With Tokyo still keeping a close eye on the yen, the Bank of Japan meets to decide policy. Governor Haruhiko Kuroda insists he will keep rates lower to spur the virtuous form of inflation he has been seeking for nearly a decade, even as markets keep pressure on the currency and the BOJ’s yield cap.

On Tuesday, Australian Treasurer Jim Chalmers unveils a budget update, the first since the Labor Party’s election victory. The next day, the latest price data out of Australia will show headline inflation running at its fastest pace since 1990.

South Korea releases GDP figures on Thursday that are expected to show slowing growth. And in Southeast Asia, Singapore releases its latest inflation report likely to show price gains remain at a 14-year high, while the Philippines’ central bank will be watched as it seeks to defend the currency against further losses.

Europe, Middle East, Africa

Britain’s ruling Conservative Party will rush to a leadership contest next week following Liz Truss’s resignation as prime minister following a failed budget that caused untold financial market turmoil.

The hastily announced rules mean a result could emerge as soon as Monday, on the basis that in a reduced field of two candidates, the one with the least support will face pressure to withdraw and end it all.

Whoever wins will inherit an economy struggling to shake off long-term decline. A long-awaited fiscal plan may attempt to address that, and the events of the next few days will determine whether the proposal will be announced on October 31 as scheduled or delayed.

While ECB policymakers focus on its rate decision on Thursday, data on economic growth across the eurozone will also draw attention.

Purchasing managers’ surveys for October will be released on Monday, while third-quarter GDP for three major countries will be released on Friday. Germany is likely to show a contraction, while the French and Spanish economies are likely to slow markedly.

Sweden, now facing a housing slump as severe as it was during the financial crisis, is also likely to have seen GDP shrink in the quarter. These data expire the same day.

Also on Friday, Russian policymakers are likely to suspend easing as inflationary pressures mount and growing uncertainty surrounding the Ukraine invasion damages confidence.

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

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

On the same day, Namibia’s central bank is likely to raise rates by 75 basis points to safeguard its peg to the rand and control inflation.

Latin America

A record central bank tightening cycle and slowing growth finally appear to be outpacing Mexico’s consumer prices, data due for release on Monday is expected to show. The headline figures are likely to have peaked at last, although the core readings may have risen from 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 just above 7%.

With that data in hand, the central bank is almost certain to keep its key rate at 13.75% for a second meeting on Wednesday. The bank has signaled its intention to keep the higher benchmark Selic for longer. Unemployment figures and formal job creation are also in sight.

On Thursday, the minutes of the Central Bank of Chile’s Oct. 12 meeting may offer additional guidance after policymakers ended a record-high hike cycle at 11.25% and said they would keep the rate there. “as long as it takes.” Chile also reports data on labor, manufacturing, copper production, and retail sales.

Closing out the week, the Banco de la República de Colombia will meet with inflation at 11.44% and still rising, the peso near record lows and the president imploring investors to keep their cash in the country. Analysts expect a 100 basis point hike to 11% on Friday with more tightening to come.

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

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