Will the Federal Reserve signal it has finished lifting rates? 

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Will the Federal Reserve signal it has finished lifting rates?

The US Federal Reserve is widely expected to lift its key interest rate by 0.25 percentage points this week. Investors will be watching for clues from chair Jay Powell as to whether the rise is the last in its 16-month monetary policy tightening campaign. 

Ahead of the two-day meeting that ends on Wednesday, several Fed policymakers have indicated a resumption of tightening after the central bank paused its hiking cycle in June for the first time in over a year. The Fed has lifted rates from near-zero at the start of 2022 to a range of 5-5.25 per cent today. 

Investors and economists are divided over whether the expected July increase will be the last. Pricing in the futures market suggests that the Fed will stop raising rates after July. This view gained steam after inflation data for June showed that consumer prices rose at the slowest pace since 2021, though pressures still remained in some core sectors. 

But hawkish Fed official Christopher Waller has said he could push for another increase in rates after July — potentially as soon as September — if inflationary pressures in core sectors persist. Economists have pointed to the consistent strength of the US labour market both as an indication that inflation could remain high, and as evidence that the Fed could safely continue to raise interest rates without necessarily pushing the economy into a recession. Kate Duguid

How close is the ECB to the finishing line?

There is little doubt that Christine Lagarde will announce another quarter percentage point increase in interest rates after the European Central Bank meets on Thursday.

The main suspense is over what the ECB president will say about the likelihood of further rate rises to ensure eurozone inflation keeps falling towards its 2 per cent target.

Some of the more hawkish members of the central bank’s rate-setting governing council have signalled some doubts over whether monetary policy will be tightened further at its meeting in September. 

Dutch central bank boss Klaas Knot said last week that further rate increases beyond this month “would at most be a possibility but by no means a certainty”. Bundesbank president Joachim Nagel said: “For the September meeting, we will see what the data will tell us.”

Economists expect the eurozone economy to remain weak and even slightly shrink when second-quarter gross domestic product figures are released later this month and inflation is likely to slow further in July, while remaining well above the ECB’s target. 

Dirk Schumacher, an economist at French bank Natixis, predicted Lagarde would adopt a “neutral tone regarding the September meeting” and that she would “leave all options on the table, also further rate hikes beyond September should this be deemed necessary”.

However, others are convinced the ECB will keep rates steady after this week. Silvia Ardagna, an economist at UK bank Barclays, said the fact the eurozone was “flirting with recession”, bank lending was contracting and insolvencies rising meant she expected no more rate rises after July. “Weaker activity is helping the disinflationary progress,” she said. Martin Arnold

Will the Bank of Japan relax its grip on the bond market? 

Investors are bracing for the Bank of Japan’s policy meeting next week after official figures showed inflation accelerated in June, adding pressure on the bank’s committee to unwind its ultra-loose monetary policy.

Market expectations for the BoJ’s meeting have fluctuated in recent weeks, with the yen rising 3.5 per cent against the dollar in early July on expectation of a policy tweak, but falling back this week after governor Kazuo Ueda signalled his intention to maintain current easing measures. 

Economists had expected Japan to relax its yield curve control policy this month, through which it buys 10-year government bonds to hold down yields, because the BoJ will publish its inflation projection for the next fiscal year, which is widely anticipated to be revised higher than 2 per cent.

But this week Ueda signalled that the central bank would maintain its easing measures at its policy meeting next week. “There is still a distance to sustainably and stably achieving our 2 per cent inflation target,” he said.

Chris Turner, head of FX strategy at ING, said: “It seems that Ueda’s comments poured some cold water on the views of those expecting a policy change.”

Despite Japan’s inflation rate rising to 3.3 per cent in June, the print was in line with the expectations of economists polled by Reuters and the yen fell 1.2 per cent on the news, as markets continued to pare back expectations of a policy change. 

“We have moved back from the view that July will be the date they loosen policy and now we expect it towards the end of the year,” said Themos Fiotakis, head of FX research at Barclays. 

Still, traders are not ruling out the possibility that the world’s third-largest economy will shock the market next week, as it did in December when the target range for yield curve control was doubled to plus or minus 0.5 per cent.

“Overall expectations for a policy change next week are very low,” Fiotakis said. “However, the BoJ has surprised us before and there are those that think the possibility for a surprise is live — that would be a big market event.” Mary McDougall