25-Basis Point Interest Rate Cut By ECB; Coming Fed Rate Unlikely to Exceed That Increment
September 12, 2024
Like yesterday’s release of U.S. consumer prices, today’s producer price data pose no resistance to an initial 25-basis point cut of the federal funds rate but are unlikely to warrant a larger reduction by the Federal Open Market Committee next Wednesday. Overall producer prices went up 0.2% versus an expected 0.1%, but their level was in line with expectations due to a downward revision to July’s PPI rise. The biggest impediment to an easing of 50 basis points next week is a 0.4% monthly rise in service sector prices in the August PPI as well as CPI figures.
The European Central Bank as anticipated announced today its second 25-basis point deposit rate cut, which drops to 3.5% from a peak of 4.0% that had been maintained from September 2023 until its initial cut in June 2024. As decided earlier, the ECB refinancing rate and marginal lending rate were reduced by 60 basis points each to 3.65% and 3.90%, respectively. This was a technical correction whose effect is narrow the corridor between those two central bank rates from 75 basis points to 40 bps. When monetary policy is in a loosening cycle, the deposit rate represents the cutting edge of policy, and a narrower band between it and the MLR reference is preferred.
Today’s ECB policy review was aligned with a scheduled update of the central bank’s macroeconomic forecasts. Officials left their projected CPI inflation path unchanged at 2.5% this year, then 2.2% in 2025 and an in-target 1.9% in 2026. Due to stickier service sector costs, the forecast for 2024 and 2025 core inflation was bumped up by 0.1 percentage point (ppt) to 2.9% and 2.3%, with that for 2026 holding at 2.0%. Projected GDP growth was bumped down for all three years and now shows a path of 0.8% this year, then 1.3% in 2025 and 1.5% in 2026. Euroland’s softer growth prognosis vis-a-vis the United States has enabled the ECB to move out in front of the Fed as both transition into less restrictive monetary policies. Each will approach this task in a data-dependent fashion, and lower interest rates are not impeding a continuing planned shrinkage of their balance sheets.
In world financial markets, the dollar edged slightly lower overnight, dipping 0.1% against the euro, sterling, kiwi, and Aussie dollar and by 0.2% relative to the Japanese yen. Stock markets in the Pacific Rim did very well Thursday, closing up 3.4% in Japan, 3.0% in Taiwan, 2.3% in South Korea, 1.8% in India and 1.1% in Australia. European and U.S. equities are in the black, too, but to a lesser degree than those above. Ten-year sovereign debt yields had fallen initially but show increases including a 2-bp move of the U.S. Treasury in the wake of the PPI release. Bitcoin, gold and oil prices each advanced after the PPI report and show net gains so far today of 0.4%, 1.1% and 1.1%.
German wholesale prices unexpectedly fell 0.8% on month in August, resulting in a 1.1% year-on-year rate of WPI deflation, its most negative point since April.
Consumer price inflation fell to a 38-month low in August in Ireland and a 37-month low of 1.9% in Sweden. Those readings represent drops from peaks of 9.2% in October 2022 and 12.3% in December 2022.
Serbian CPI inflation held steady last month at 4.3% versus a 35-month low of 3.8% in June. Russian CPI inflation likewise stayed put at 9.1% last month. That’s up from lows of 2.3% in April 2023 and February 2020 that sandwiched a high of 17.8% recorded in April 2022.
Spanish consumer price inflation slowed to a 13-month low of 2.3% in August from 2.8% in July. The peak in 2022 of 10.8% was hit in July that year.
Japanese domestic producer price inflation fell back from an 11-month high of 3.0% in July to a 3-month low of 2.5% in August. Reflecting the yen’s sharp rebound this past summer, import prices plunged 6.1% on month in August, imploding their 12-month rate of increase to 2.6% from 10.8% in July.
In India, consumer prices were flat last month, but their 12-month increase moved above July’s 58-month low of 3.54% to a 2-month high of 3.65%.
Foreshadowing the ECB easing, the National Bank of Serbia policy interest rate earlier in the day announced a 25-basis point interest rate cut of its own to 5.75%. This was the third such reduction since June. A peak of 6.5% had prevailed previously since July 2023. Serbian inflation of 4.3% lies near the top of the central bank’s 1.5-4.5% target band. Officials are proceeding with caution in light of global uncertainties and do not project a sustained restoration of the target’s center until the second half of next year.
Central banks in Uzbekistan and Pakistan also reviewed policy today. Uzbekistan’s interest rate was left unchanged at 13.5%, three percentage points above the current 10.5% rate of consumer price inflation. Following a peak of 17.0% maintained briefly between March and June of 2022, the rate was cut by 100 basis points in June 2022, July 2022 and March 2023. A further 50-bp cut followed in July of this year.
With Pakistani CPI inflation dropping to a 34-month low of 9.6% in August, officials at the Central Bank of Pakistan reduced their key interest rate by 200 basis points today to 17.5%. There were also cuts made in June and July from the peak of 22.0% that had been maintained from June 2023 until June 2024. Still at 17.5%, Pakistan’s interest rate remains over 10 percentage points above the 7.0% pandemic low between June 2020 and September 2021.
A measure of British housing prices compiled by the Royal Institute of Chartered Surveyors moved into positive territory, albeit just +1% in August, for the first time in 22 months.
New U.S. jobless claims maintained their steady pattern last week, rising just 2k to 230 thousand, which lies within the 228-234k range for now six straight weeks.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Central Bank of Pakisan, Central Bank of Uzbekistan, European Central Bank, German wholesale prices, Japanese PPI, National Bank of Serbia, U.S. PPI and jobless insurance claims
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