ECB raises rates to 22-year high and signals more to come. The European Central Bank (ECB) raised its benchmark interest rates for the eighth time in a row as expected on Thursday and indicated more hikes are in the pipeline in effort to tame inflation. The central bank announced it is hiking its main rate up by 25 basis points to 3.5 percent, in contrast with the US Federal Reserve’s decision to pause its hikes (see below). The picture is fairly complicated. ECB Policy makers need to factor in an economy that is doing worse than expected and pay close attention to how the steepest rate hikes in the ECB’s history are filtering through to companies and households.
Federal Reserve skips rate rise but signals more increases on the way. In a monetary policy meeting on Wednesday, the Federal Reserve (Fed) left interest rates unchanged but indicated that borrowing costs may still need to rise by as much as half of a percentage point by the end of this year, as the US central bank reacted to a surprisingly resilient economy and a stubbornly high inflation. In an attempt to tackle inflation, which is still double the Fed’s target, Fed policymakers have raised the central bank’s benchmark interest rate for ten consecutive times since March 2022. In a statement released by the Fed, officials said “Holding the target range steady at this meeting allows the committee to assess additional information and its implications for monetary policy,”.
Mild rebound in eurozone industrial production. According to official data, industrial production in the eurozone rebounded in April, indicating that the manufacturing sector recovery is attempting a comeback. Industrial production in the countries that share the euro currency posted a monthly increase of one percent, in line with expectations, partly retracing the 3.8 percent fall seen in March. However, a 14.7 percent increase in capital goods output and a one percent increase in energy production were the only components which added up to the expansion. On an annual basis, industrial output increased by just 0.2 percent. It was expected to increase by 0.8 percent by economists after falling by 1.4 percent the previous month. The second-quarter gross domestic product does not look promising based on these facts. Despite a small increase in production in April, industrial output is still well below the first-quarter average.
UK labour market tightens, adding pressure on Bank of England. Wages in the UK shot up as unemployment fell unexpectedly in April, signalling that the robust UK economy continues to defy efforts to cool demand and stave off inflationary pressures. The figures published by the Office for National Statistics on Tuesday show that the number of employees and self-employed workers increased in the three months to April, raising the UK employment rate to 76.0 percent, a record high. During the same time-period, the unemployment rate fell to 3.8 percent from 3.9 percent in the preceding period. Economists had forecast unemployment to rise to four percent. On the other hand, average wages including bonuses grew by 6.5 percent annually, which was much faster than the expected 6.1 percent increase. As part of its ongoing efforts to bring inflation under control, the Bank of England will closely examine the April data., which include the impact of a 9.7 percent rise in the minimum wage.
China cuts rates to prop up flagging recovery. Tuesday saw an unexpected loosening of monetary policy from the People's Bank of China (PBoC), and it is anticipated that authorities will add more stimulus in the near future by cutting to the benchmark lending rate. Following the much-anticipated post-pandemic reopening that turned out to be underwhelming, several economic indicators have recently shown that the economy is losing momentum. The PBoC cut the seven-day reverse repo rate from 2 percent to 1.90 percent. This was the first reduction since a similar sized reduction in August last year.
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