Commentary: ECB signals the hiking cycle is likely over
Contrary to expectations, the European Central Bank hiked by 25bps to bring the key deposit rate to 4.0%. The ECB President Lagarde hinted that this might be the last rate hike, stating that the level is such that if “maintained for sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target”. Meanwhile, the growth outlook for Euro Area has deteriorated slightly. As industrial production has weakened gradually, the European Commission (EC) cut the forecast for 2023 GDP growth from 1.1% to 0.8%. The EC has also projected a 0.4% contraction for German economy in 2023 (against the prior forecast of 0.2% growth).
Meanwhile, the US headline inflation showed the largest monthly increase in a year (0.6% m/m). On top of that, the Producer Price Index (PPI) surprised on the upside and came in at 0.7% m/m vs 0.4% forecast. These figures are in line with strong spending from American consumers, as illustrated by a higher-than-expected growth in August retail sales (0.6% m/m vs 0.2% forecast).
On Wednesday, the US Federal Reserve will make an interest rate decision. The market-implied probability of a 25bps hike stands at a mere 2%, while there is a 98% chance of no rate change.
