Recent data from a Reuters poll suggests that economists are predicting a decrease in headline Year-over-Year (YoY) inflation to +2.6%, which is a 0.3 percentage point drop from the previous month’s +2.9% in July. The estimated range falls between +2.6% and +2.4%. Core inflation, which excludes energy and food components, is expected to remain steady at +3.2% YoY, mirroring July’s figures. This comes after a trend of softer data over the past four months. Month-over-Month (MoM), both headline and core inflation are anticipated to increase by +0.2%, aligning with the numbers from July.
There is ongoing debate surrounding whether the Federal Reserve will opt for a 25 or 50 basis point cut in interest rates. Despite the softer inflation figures (which could potentially weaken the USD) and a decrease in job growth observed in August, the overall economic landscape does not signal an impending recession. With unemployment at 4.2% and real GDP growing at a rate of +3.0% (second estimate) in Q2 24, it is unlikely that the Fed will choose a more significant 50 basis point reduction.
The European Central Bank (ECB), on the other hand, is widely expected to reduce all three benchmark rates at the upcoming meeting. Having already implemented a 25 basis point rate cut in June, markets are anticipating another reduction this week as headline inflation hovers around the central bank’s target of 2.0%. Analysts predict a further 25 basis point cut at the December meeting, with a total of 63 basis points decrease expected by the end of the year.
In the Euro area, Consumer Price Index (CPI) inflation decreased to +2.2% YoY in August from +2.6% in July, marking the lowest level since mid-2021. However, core inflation (excluding energy, food, alcohol, and tobacco) remains a concern. Despite a slight decline to +2.8% YoY in August, down from +2.9% in July, the average core inflation rate has stayed at +2.9% since the beginning of the year. This, combined with steady services inflation and elevated wage growth, will likely prevent the ECB from implementing more than two rate hikes this year.
Apart from the rate adjustments, the ECB is expected to provide updated economic forecasts in its upcoming meeting. Analysts anticipate revisions, particularly in headline inflation, wages, and GDP growth. This could potentially impact the value of the Euro, with a possible upward revision in core inflation. Investors will closely monitor any hints regarding future rate reductions in the central bank’s forward guidance, although expectations are muted regarding substantial commentary.
The current economic forecast suggests a mixed outlook for global monetary policy. While the Federal Reserve is cautious about the need for significant rate cuts, the ECB is poised to continue its easing cycle to stimulate economic growth. Keeping a close eye on inflation trends and economic indicators will be crucial in understanding the trajectory of central bank policies moving forward.