Central banks from the euro zone to Japan are about to reveal if they can resist the global urge for aggressive monetary tightening led by the US Federal Reserve.
Almost all economists reckon the European Central Bank on Thursday will limit its first interest-rate hike in more than a decade to a mere quarter point, hours after the Bank of Japan keeps its own stimulative stance unchanged.
Such outcomes would showcase some of the world’s last bastions of hesitancy in the face of surging inflation.
Monetary officials from South Korea to Canada ratcheted up tightening in the past week, while investors began betting on an historic one percentage-point move by the Fed.
Since early June, when ECB policy makers outlined a plan to begin hikes only gradually, they’ve stuck to that line, insisting that inflation, even at four times their goal, doesn’t reflect underlying pressures in an economy bordering on a war zone.
Officials in Japan, where consumer-price growth is much lower, also face questions on how long ultra-low rates can persist.
The Japanese government’s strong election victory last week shows public angst against inflation isn’t yet at critical levels, but the assassination of former Prime Minister Shinzo Abe has removed one of the most vocal advocates of easy monetary policy within the ruling party.
With global tightening intensifying, policies in the euro region and Japan have prompted investors to sell their currencies, complicating the central banks’ tasks as import costs soar.
The euro has fallen so far that it brushed with parity against the dollar in last week for the first time since 2002, while the yen has set fresh lows stretching back to 1998.
Other Group of 20 outlier decisions are due. Turkey’s rates may stay unchanged given its unorthodox policy not to tighten despite inflation, Indonesia should stay on hold, and Russian officials may cut. By contrast, South Africa is seen enacting an aggressive hike. Among data reports on the agenda, UK inflation may edge closer to 10 per cent.
Treasury Secretary Janet Yellen travels to South Korea at the start of the week following the G-20 meeting of finance ministers in Bali. Shoring up supply lines and touting her Russian oil price cap are themes she may touch on.
The BOJ is expected to maintain rock-bottom rates on Thursday. Its latest price forecasts, and separate inflation figures due Friday, will offer clues on whether that stance will continue.
Chinese banks are expected to keep lending rates unchanged on Wednesday as the economy ekes out a slower-than-expected recovery from Covid lockdowns.
Reserve Bank of Australia Governor Philip Lowe and his deputy, Michele Bullock, will speak in the coming week as bets emerge that the RBA will opt for a 75 basis point hike in August after robust labor market figures.
Early July export data from South Korea on Thursday will give the latest global trade pulse. Indonesia’s central bank also decides on rates that day.
Europe, Middle East, Africa
The ECB’s decision will be the dominant event. Aside from a focus on the size of its rate hike, investors will watch for details of a new crisis tool aimed at containing the fallout on Italy from rising borrowing costs - just as a political crisis threatens to force out Prime Minister Mario Draghi.
Euro region data may illustrate the worsening growth situation facing the ECB, with surveys of purchasing managers and consumers predicted to weaken. Hanging over the economy is the threat of a shutoff in Russian gas, which could take effect on Thursday.
The case for faster Bank of England rate hikes may harden if a predicted uptick in underlying wage pressures and another acceleration in inflation materialize. Economists reckon consumer-price increases will edge closer to 10 per cent.
Governor Andrew Bailey could address those concerns during a speech in London on Monday, while political machinations fixate Westminster as the race to succeed Prime Minister Boris Johnson narrows to two candidates in the days that follow.
Central banks will draw attention elsewhere on Thursday, too. Officials in war-torn Ukraine have indicated they aim to keep their key policy rate unchanged, while Hungary’s weekly decision may showcase its struggle to stabilise the forint. Turkey’s central bank is expected to keep its rate on hold.
In Russia, which is also bucking the global rate-hiking trend, another cut is possible on Friday as inflation slows and the economy contracts amid international sanctions.
Price pressures and currency weakness in South Africa will probably translate to a rate increase on Thursday. Investors are pricing in a half-point move but see a chance of a bigger hike.
Nigeria’s central bank may raise rates for a second consecutive meeting on Tuesday after inflation accelerated to a five-year high.
In the US, the economic data calendar is light and concentrated on the housing sector. Data on home construction starts are expected to show a modest bounce in June after slumping a month earlier to the lowest level in a year.
Figures on sales of existing homes are forecast to show lingering weakness after a rise in mortgage rates. Investors will also watch weekly jobless claims on Thursday for signs of softer labor demand.
Fed policy makers are in a blackout period ahead of their July 26-27 meeting.