Will the European Central Bank signal further rate rises are coming?
There is little suspense over what the European Central Bank will decide on interest rates this week — it has clearly signalled its intention to raise its deposit rate by half a percentage point to 3 per cent. So investors will focus more on what it says about future policy decisions.
Some ECB-watchers think that after eurozone inflation overshot expectations in February — with core price growth excluding energy and food accelerating to a new record high — the bank will want to signal that significant rate hikes lie ahead.
“For the market, the more important element is not the March hike but what the ECB signals for May and beyond,” said Mark Wall, chief economist at Deutsche Bank. “With the hawks in the driving seat, we expect another more-or-less unconditional commitment to a further 50 basis point hike in May.”
However, some of the more dovish members of the ECB governing council want it to stick to its plan to decide future rate moves on a “meeting-by-meeting” basis without pre-committing, because they believe inflation will fall rapidly in the coming months.
“The heat is on,” said Carsten Brzeski, head of macro research at ING, adding that because “fine-tuning of market expectations at the press conference often failed”, the ECB may instead opt for “a very defensive communication strategy” with little forward guidance.
A key factor in this debate will be how rapidly the central bank expects inflation to drop towards its 2 per cent target in the new forecasts it will publish on Thursday. Most economists expect the ECB to cut its forecasts for headline inflation but to raise them for core price growth, giving something to support both sides’ arguments. Martin Arnold
How fast is US inflation falling?
US inflation has been slowing consistently since last summer. But a slower than expected decline in last month’s data fuelled expectations that the Federal Reserve would be forced to keep interest rates higher for longer, stirring up markets.
The latest figures on Tuesday are expected to show that consumer prices rose at an annual pace of 6 per cent in February, down from 6.4 per cent in January, according to economists’ forecast compiled by Bloomberg.
That would represent the slowest rate since September 2021 and a bigger drop than last month, and is likely to have been driven by smaller rises in prices of goods, new cars — thanks to continued improvements in supply chain dynamics — and clothing. But Credit Suisse cautioned that housing prices are likely to remain robust, saying that shelter inflation will “continue to be the main driver of overall core inflation.”
“Housing activity and prices have slowed, but it will take time for this to pass through in CPI — a peak is not likely until at least the middle of the year,” analysts at the bank said.
Anything less than robust evidence that inflation is slowing rapidly will probably pose challenges for the Fed, which has maintained it remains focused on reaching its 2 per cent target. Kate Duguid
Will there be tax cuts in the UK Budget?
On March 15 Jeremy Hunt will deliver his first full Budget statement since the September “mini-Budget” of his predecessor Kwasi Kwarteng upset Gilt markets.
Investors are expecting the chancellor to strike a more responsible tone than his predecessor and avoid any big tax giveaways, such as changes to the rules that govern how much can be saved into a pension before tax charges apply. Last week, more than a dozen pension and investment companies wrote to the Treasury calling for reforms to tax rules which they say penalise over-55s returning to the workforce.
“Markets will not want anything to destabilise the Treasury’s finances — taxes are up and likely to stay that way for a while,” said Koray Yesildag, director of investment management research at Aon. “In pensions, despite calls for changes to annual and lifetime allowances, we do not predict much news from Mr Hunt, because most moves to reduce complexities would reduce the government’s tax take, which is clearly not a priority right now.”
However, to address stagnant UK growth, Hunt is expected to carve out new tax breaks for business — although they are likely to be on a smaller scale than the “super-deduction” scheme they would replace, which offers a 130 per cent tax relief on company equipment purchases and has cost over £25bn in two years.
“Some business investment promotion will be seen as a positive, but I would say they will be temporary measures rather than permanent ones,” said Mark Preskett, senior investment consultant and portfolio manager for Morningstar Investment Management. “For us this isn’t the time to start swinging the baton.” Martha Muir