Will ECB minutes shed light on when the central bank will raise rates?

Will ECB minutes shed light on when the central bank will raise interest rates?

How long do European Central Bank rate-setters expect to keep buying bonds and when might they raise interest rates from their ultra-low levels? More light is due to be shed on these crucial questions when the minutes of last month’s ECB policy meeting are published on Thursday.

Investors are likely to scour the minutes for any clues on how the debate is shaping up between ECB policymakers over the big decisions they are preparing to make at their next policy meeting on December 16.

Most investors expect the ECB to say next month that its flagship €1.85tn bond-buying programme, which it launched last year in response to the pandemic, will come to an end in March 2022. However, the central bank is widely expected to step up its longer standing asset purchase programme at the same time to limit any sell-off in bond markets.

Having committed not to raise rates before it stops buying bonds at the point of issuance, next month’s decision will send a vital signal on the timing of the first rate rise. Especially as investors are betting the ECB could raise rates by early 2023 in response to higher than expected inflation caused by surging energy prices and supply chain bottlenecks.

“In the medium term we think there is enough upward pressure on inflation for the ECB’s own forecasts to be at or above its 2 per cent target in the medium term, so it will be able to declare mission accomplished and raise rates,” said Carsten Brzeski, head of macro research at ING. Martin Arnold

How will UK and eurozone business activity fare?

A key survey of UK business activity due on Tuesday will provide a snapshot of how the economy has fared in recent weeks.

The IHS Markit purchasing managers’ index unexpectedly showed improved growth momentum in October and while analysts expect a deceleration in November, a positive surprise might feed into expectations on whether the Bank of England will increase interest rates in December.

Economists polled by Reuters forecast the preliminary PMI reading for services to fall to 58.5 in November from 59.1 in the previous month.

Sandra Horsfield, economist at Investec, said that she has pencilled in “a slight moderation” in the composite index, which averages services and manufacturing, in November as she expects that “the manufacturing sector continued to be constrained by supply chain shortages, while ongoing staff shortages may have hampered output growth in both the manufacturing and service sectors.” She added that price pressures “are also likely to be a key theme of the report.”

Line chart of Purchasing managers' index, below 50= a majority of businesses reporting a contraction showing UK services activity expected to show resilience

A more downbeat reading is expected for eurozone PMI as businesses not only face surging costs and ongoing supply chain disruptions, like those in the UK, but also rising coronavirus infections that led many countries to reintroduce new restrictions.

As a result, analysts forecast the eurozone PMI index for services to decline to 53.6 in November, down from 54.6 in October and the lowest since April. The same figure for Germany, where the rise in infections is particularly sharp, is expected to tumble to 51.5. Valentina Romei

Will PCE inflation data add to the case for a US interest rate rise?

Earlier this month, blockbuster consumer price data showed that US inflation rose in September at its fastest rate in 30 years. But the Federal Reserve’s preferred measure of inflation — the personal consumption expenditures price index — for October will be released on Wednesday, and markets will be watching for further signs of price pressures.

Evidence of such pressures has already driven market speculation that the US central bank may be forced to raise borrowing costs faster than anticipated. The Fed earlier this month announced that it would begin slowing its pandemic-era quantitative easing programme, but investor attention quickly turned to the possibility of interest rate rises.

The market is currently pricing in a roughly 80 per cent chance of three quarter-point interest rate increases by the end of 2022, with better-than 50 per cent odds that the first hike will come as soon as June, according to CME Group’s FedWatch tool. A month ago the chances of three rate hikes by December were roughly 25 per cent.

PCE data reflects changes in household expenditures. A subsection of the data known as core PCE, which discounts the effects of the volatile food and energy sectors, is particularly closely watched. Analysts at TD Securities said they expect the PCE data to show that prices rose strongly, though at a slower pace than the CPI index. They estimate that the year-over-year change is likely to have risen to 4.1 per cent from 3.6 per cent. They also expect the report to show consumers beginning to spend down excess savings, which means nominal spending will outpace income and the savings rate could drop below its pre-Covid level. Kate Duguid

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