US Federal Reserve and European Central Bank officials could launch their final interest rate rises this week as inflation ebbs in their respective economic blocs, experts are betting.
Members of the federal open market committee (FOMC) are on Wednesday tipped to raise borrowing costs 25 basis points to a range of 5.25 per cent and 5.5 per cent.
Those on the ECB’s governing council are projected to lift rates by the same amount to 3.75 per cent the next day.
An easing in price rises in the world’s largest economy and the common currency euro bloc has reduced the need for more policy tightening beyond the next round of meetings this week.
Prices have risen three per cent over the last year in the US, the slowest rate in more than two years, while in the eurozone, inflation is expected to have dropped to around 5.3 per cent in the year to July from 5.5 per cent in the previous month.
However, there is a chance that Fed chief Jerome Powell and ECB president Christine Lagarde leave the door open for another rate increase in September at their press conferences after this week’s rate announcements.
“25 basis point hikes from both look a done deal and widely expected. The more pressing question though is whether the peak in rates will have been reached or whether one more hike is on the cards for September,” analysts at Investec said.
“The ECB wants the market to understand its commitment to the timely return of inflation to target and its willingness to go “higher and longer” if necessary,” Deutsche Bank experts said.
Powell and Lagarde are mandated to keep inflation at two per cent.
There is a growing sense that inflation has finally turned a corner in the world’s largest economies after nearly two years of ripping price rises, meaning central banks could be close to the end of the tightening cycles.
However, strong core inflation of nearly seven per cent, sky high food price growth and accelerating wages is likely to compel Bank of England governor Andrew Bailey and co into a few more rate rises.
Financial markets think Threadneedle Street will eventually stop tightening at 5.75 per cent. UK rates are currently five per cent.
Last week’s better than expected inflation figures did bring down peak market rate expectations from around 6.25 per cent. A smaller 25 basis point rise is also priced in for the next monetary policy committee meeting on 3 August.
Food price inflation is likely to have eased again in July, the British Retail Consortium’s UK shop price index on Wednesday is expected to show.
On the corporate front, UK banks lead the way. The sector is poised to have fattened up profits by charging more for loans – made possible by the Bank’s 13 successive rate rises – while keeping savings rates attritional.
Lloyds Bank updates the City on Wednesday, as does Barclays and NatWest and Thursday and Friday respectively. Santander and Standard Chartered post second quarter results on Wednesday and Friday respectively.
Last week, the FTSE 100 clocked a very punchy performance, climbing three per cent to finish at 7,663.74 points.