(Bloomberg) – As the Federal Reserve nears a possible pause in interest rate hikes, two tight decisions elsewhere in the world offer a taste of the dilemma facing US officials.
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The Reserve Bank of Australia and Bank of Canada were not expected to raise borrowing costs at their meetings next week, until the latest data suddenly made financial markets nervous about further action.
These decisions come just days before the Fed’s announcement on June 14th. Recently, some Fed officials have signaled that they are leaning towards a pause, while others have indicated that they prefer to carry on in the fight against inflation.
First up on Tuesday is the RBA. Hotter-than-expected CPI data, a sharp hike in Australia’s minimum wage and growing concerns that inflation expectations are getting out of hand have made the decision a decision.
Goldman Sachs Group Inc. expects a hike after changing its outlook following the inflation figure, while the Royal Bank of Canada revised its forecast following the pay decision. They forecast a quarter point rise in the cash rate to 4.1%. Money markets see a little over 50% chance of a rise while the majority of economists expect a pause.
Governor Philip Lowe has ramped up his rhetoric, fearing a tight labor market and rising house prices will make households feel more affluent and fuel inflation further. In contrast, the RBA has conducted its most aggressive tightening cycle in a generation – 11 rate hikes in 12 months – and economic activity is cooling.
Canada’s central bank is also in a bind ahead of Wednesday’s meeting. A steady stream of upside surprises — including on GDP and jobs — are challenging long-held assumptions that the country’s economy is more interest-rate sensitive than its peers’ economies.
The story goes on
While some heavily indebted households are feeling the strain of higher borrowing costs, many consumers are resilient. The price pressure is also proving to be more persistent than expected.
Traders in the overnight swap markets see about a one-third chance that Gov. Tiff Macklem will hike rates, with economists divided on the likely outcome.
Whichever way they choose, Canadian policymakers will at least brace themselves for further hikes in borrowing costs over the summer, allowing them to start tightening again when they have more comprehensive guidance in July.
What Bloomberg Economics says:
“Fed Chair Jerome Powell’s approach to risk management is to take an incremental approach. As such, we still expect the Fed to hold back on a rate hike at the June 13-14 FOMC meeting – despite the increased risk that Powell will be unable to reach consensus.”
—Anna Wong, Stuart Paul and Eliza Winger, economists. For a full analysis click here
Highlights include numerous rate decisions from India to Russia, Chinese trade and inflation numbers, other CPI reports from Turkey to Brazil and the European Central Bank Governor’s statement. The World Bank will release new economic forecasts on Tuesday and the OECD will follow with its own estimates a day later.
Click here to find out what happened last week. Below is an overview of developments in the global economy.
US economy
The US economic data calendar is tenuous next week and policymakers are on the sidelines ahead of the Fed’s June 13-14 policy meeting.
On Monday, the Institute for Supply Management will release its service activity indicator for May. The metric is forecast to show a faster pace of expansion, in contrast to the ISM manufacturing index, which showed a seventh month of contraction.
A government report on Wednesday is likely to show that the US trade deficit widened in April, the fastest in six months. Merchandise trade data earlier released showed a larger deficit during the month as US exports fell and imports rose.
Asia
China will release its latest trade numbers mid-week. Data to be watched closely after the latest PMI readings showed further moderation in the world’s second largest economy’s recovery. Inflation data on Friday is likely to show muted price pressures.
Aside from Australia’s central bank announcement, the Reserve Bank of India will make another major decision in the region on Thursday. Economists assume that interest rates there will remain on hold.
Indonesia, Thailand and the Philippines will all release inflation figures earlier in the week.
Japan is due to release revised first-quarter growth numbers as well as its latest payroll numbers as Prime Minister Fumio Kishida is likely to continue contemplating early elections.
Europe, Middle East, Africa
The euro zone’s first quarter performance will be reviewed this week with more detailed data that could point to stagnation or even recession after Germany suffered such a slowdown.
Another focus will be how Europe’s largest economy fared at the start of the second quarter in three reports, starting Monday with exports, followed by factory orders and industrial production. Italian and Spanish factory data will also be published.
Less retrospective and more relevant to the ECB will be its own consumer survey, to be released on Tuesday. It will show whether expectations of faster inflation are solidifying, even as data suggests price growth may be slowing.
Policymakers will make final comments before a pre-meeting lockdown begins on Thursday ahead of the June 15 interest rate decision. ECB President Christine Lagarde’s appearance in the European Parliament on Monday could attract attention.
Elsewhere in Europe, Monday’s inflation data from the Swiss National Bank could offer some consolation as the underlying indicator of price growth is expected to drop to the 2 percent mark.
The corresponding report from Norway on Friday might be less encouraging: inflation there is still expected to be above 6%. On the same day, neighboring Sweden will release its monthly GDP indicator for April, the latest health check for an economy the European Commission has forecast will see the region’s sharpest contraction this year.
Elsewhere, three central bank decisions are planned:
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On Wednesday, Polish officials are likely to leave interest rates unchanged after slowing inflation fueled speculation of an impending cut.
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Serbia’s central bank on Thursday will consider whether to pause tightening for a second time or resume rate hikes.
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On Friday, the Bank of Russia could keep interest rates on hold at 7.5%, extending the longest pause since late 2015 into mid-2016. However, officials are increasingly wary of inflationary risks.
Looking south, Turkey could release its first negative monthly inflation reading in more than four years on Monday after TurkStat decided to record May residential gas prices at zero.
President Recep Tayyip Erdogan promised during his re-election campaign to donate free petrol to households for a month. Annual inflation is likely to slow to just under 40%.
Data on Tuesday is likely to show that South Africa averted a recession in the first quarter despite more frequent power outages. The central bank forecasts the economy grew 0.4% in the three months to March after contracting 1.3% in the previous period.
And on Thursday, data is likely to show that South Africa ran a current account deficit in the first quarter.
Latin America
In Brazil, inflation has fallen by almost 800 basis points since last April. Data for May, to be released this week, is expected to show another drop of almost 4%.
Analysts polled by the central bank expect the June reading to continue falling towards the target, followed by a renewed rise the following month as last July’s negative reading breaks the 12-month range.
According to central bank governor Leonardo Villar, inflation in Colombia has reached a “tipping point” after a nearly uninterrupted two-year rise. The consensus forecast for May is slightly below 12.7%.
Rounding out the week’s inflation readings from the region’s five major economies are data from Mexico and Chile which should clearly show that all are now firmly in the grip of disinflation.
In terms of monetary policy, expect the Peruvian central bank to leave interest rates unchanged, although most analysts believe the board will retain some leeway by not capping it at 7.75%.
Closely watched surveys of economists in Brazil and Mexico could result in slight downward revisions to consensus forecasts for year-end inflation.
Argentina goes in the opposite direction. The country’s deepening financial crisis suggests the steady deterioration in output and inflation forecasts will continue in the central bank’s survey of economists released on Friday.
– With support from Vince Golle, Sylvia Westall, Robert Jameson and Andrea Dudik.
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