The extension of Europe’s gradual interest rate hikes and tightening cycles
2023-09-08
■ In the eurozone, some inflation-related indicators indicate that the trend of slowing inflation is slowing down.
■ The European Central Bank (ECB) plans to gradually raise interest rates, but the accompanying financial tightening may be prolonged.
Since the end of last month, inflation and labor-related indicators in the eurozone have shown that despite a slowdown in economic growth, the pace of inflation slowdown is still very slow. In addition, by carefully analysing the data, it can be seen that the current signs of slowing inflation are weakening.
In terms of inflation-related indicators, the consumer price index (CPI) in August (up 5.3% year-on-year, core index excluding energy, food, alcohol, and tobacco, also up 5.3%) showed signs of slowing down in the core indicators of inflation targets, and the index has already reached its peak. However, if you carefully observe the comparison from last month, although the rate of service price increase has slowed down, the energy and commodity prices that have fallen in recent months have rebounded. Survey data shows that in August's corporate and consumer surveys, the manufacturing and construction industry sales price expectation index, which had been declining for several consecutive months, as well as the consumer price trend index (for the next 12 months), have stopped declining. The July consumer survey released by the European Central Bank (ECB) shows that the expected inflation rate (2.4%) for the next 3 years has increased, and the downward trend of the expected inflation rate (3.4%) for the next 1 year has also slowed down. Multiple indicators indicate that enterprise price setting and consumer price judgment are undergoing changes.
In terms of labor-related indicators, the unemployment rate (6.4%) in July remained at a record high, while the job search rate (3.0% in the quarter from January to March) also remained much higher than the pre-pandemic level, indicating that the balance between labor demand and supply has hardly improved. In Germany, France, Spain, and the Netherlands, the minimum wage continues to rise, and the upcoming Eurozone wage increase rate (April-June quarter) is expected to continue to rise significantly.
The yield gap between the five-year inflation swap in the Eurozone and the 10-year German treasury bond is not large. From the perspective of real interest rates, the long-term financial tightening effect has not been clearly reflected, which is different from the situation where the real long-term interest rates in the United States have significantly increased to positive values. The ECB has determined that the policy interest rate has reached a neutral level and emphasized that the policy will adopt a neutral stance in the future. Although continuous interest rate hikes have been interrupted to assess the impact on the sluggish economy, the necessity of interest rate hikes has not been denied from the perspective of inflation and labor market trends. With the gradual increase in interest rates, the tightening cycle may become even longer.
■ The European Central Bank (ECB) plans to gradually raise interest rates, but the accompanying financial tightening may be prolonged.
Since the end of last month, inflation and labor-related indicators in the eurozone have shown that despite a slowdown in economic growth, the pace of inflation slowdown is still very slow. In addition, by carefully analysing the data, it can be seen that the current signs of slowing inflation are weakening.
In terms of inflation-related indicators, the consumer price index (CPI) in August (up 5.3% year-on-year, core index excluding energy, food, alcohol, and tobacco, also up 5.3%) showed signs of slowing down in the core indicators of inflation targets, and the index has already reached its peak. However, if you carefully observe the comparison from last month, although the rate of service price increase has slowed down, the energy and commodity prices that have fallen in recent months have rebounded. Survey data shows that in August's corporate and consumer surveys, the manufacturing and construction industry sales price expectation index, which had been declining for several consecutive months, as well as the consumer price trend index (for the next 12 months), have stopped declining. The July consumer survey released by the European Central Bank (ECB) shows that the expected inflation rate (2.4%) for the next 3 years has increased, and the downward trend of the expected inflation rate (3.4%) for the next 1 year has also slowed down. Multiple indicators indicate that enterprise price setting and consumer price judgment are undergoing changes.
In terms of labor-related indicators, the unemployment rate (6.4%) in July remained at a record high, while the job search rate (3.0% in the quarter from January to March) also remained much higher than the pre-pandemic level, indicating that the balance between labor demand and supply has hardly improved. In Germany, France, Spain, and the Netherlands, the minimum wage continues to rise, and the upcoming Eurozone wage increase rate (April-June quarter) is expected to continue to rise significantly.
The yield gap between the five-year inflation swap in the Eurozone and the 10-year German treasury bond is not large. From the perspective of real interest rates, the long-term financial tightening effect has not been clearly reflected, which is different from the situation where the real long-term interest rates in the United States have significantly increased to positive values. The ECB has determined that the policy interest rate has reached a neutral level and emphasized that the policy will adopt a neutral stance in the future. Although continuous interest rate hikes have been interrupted to assess the impact on the sluggish economy, the necessity of interest rate hikes has not been denied from the perspective of inflation and labor market trends. With the gradual increase in interest rates, the tightening cycle may become even longer.