Fed Ends Interest Rate Hike Cycle, While ECB Raised Rates Again

Consumer price inflation in the U.S. rose by half a percentage point to 3.7 percent annually in August, driven by rising energy prices (oil derivatives). For monetary policy, the ‘more important’ measure of core inflation (excluding food and energy prices) has fallen for the fifth consecutive month to 4.3 percent in August from 4.7 percent in July. It is encouraging that the growth of housing costs, which is the most significant item of personal consumption in the U.S., has slowed, with the annual rate dropping to 7.8 percent from 8.8 percent recorded last spring, according to the Croatian Employers’ Association in this week’s analysis.

The turnaround in rental prices is particularly important as they typically show a persistent upward trend that can only be reversed by signs of worsening conditions in the labor market. Regarding the Fed’s success in combating high inflation, it is particularly encouraging that the modest average quarterly growth of core inflation is only 0.2 percent per month, which, when annualized, indicates a return of inflation close to the target level of around 2 percent.

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Source: Fed/Photo: HUP

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Inflation continues to move in the desired direction. There is little likelihood that the latest inflation data will change financial market expectations that the Fed will opt for a ‘pause’ in raising benchmark interest rates at next week’s meeting. Some analysts are convinced that the cycle of interest rate hikes should be halted. After all, the most sought-after ‘goods’ – labor market data to which the Fed increasingly refers ahead of upcoming interest rate decisions – indicate a ‘cooling’. Employment growth is indeed slowing, the number of job openings is evidently falling, and wage growth has likely already peaked.

ECB Raised Deposit Rate to Four Percent

Contrary to recent divided expectations, the European Central Bank raised the deposit rate by 25 basis points to four percent, very academically, in line with the increased inflation forecast for 2024 due to more expensive energy. At the same time, the ECB assures us that further interest rate hikes are unnecessary as monetary tightening has already contributed to slowing growth. In the negatively revised GDP growth forecasts, the one for 2024 stands out, where the ECB predicts growth of 1 percent (previously 1.5 percent), but not a recession, which could still prove (too) optimistic, according to HUP.

In the upcoming period, however, it will become clear that elevated inflation is not easy to bring down to the benchmark level of around 2 percent. Due to relatively strong wage growth this year and next, companies in the service sectors are facing a new round of cost increases. After an expected wage growth of around 5.5 percent this year, the ECB anticipates a relatively strong increase in 2024 of around 4.5 percent. This development in labor costs is the main reason why, contrary to the expectations of most, no cuts in ECB interest rates should be expected in the foreseeable future.

The ECB also assesses that generous state support measures from recent years continue to raise inflation in 2024 and even in 2025. The International Monetary Fund, for example, estimates that the shift of the economy towards ‘green’ production technologies raises inflation by 0.2-0.4 percentage points annually.