Interest rates are expected to increase in the US and Europe this week but the market will be looking for signals that central banks think this round of monetary tightening is close to an end.
The Federal Open Market Committee is widely expected on Wednesday to raise its benchmark rate by another quarter of a percentage point following a reprieve in June.
That will increase the federal funds rate to a target range of between 5.25% and 5.5%.
Jim Reid at Deutsche Bank thinks the US Federal Reserve will almost certainly hike by 25 basis points “which we and the market expect to be the final hike in the cycle.”
“The key for this meeting is if and how much the Fed messaging changes given recent softer inflation data,” he said, although he thinks the Fed will “maintain a hawkish bias even if they acknowledge the progress.”
The most recent figures showed a sharp easing in the annual rate of inflation bringing it closer to the Fed’s 2% target boosting hopes of a ‘one and done’ move.
In Europe, a similar move is expected. ING Economics’ Carsten Brzeski said it was “no brainer”.
“Not only did Christine Lagarde basically pre-announce the rate hike at the June meeting, macro data released since that meeting have not fundamentally changed,” he explained.
Looking beyond the July meeting, signs of a cooling economy and fading inflationary pressure will make the discussion at the ECB about how far to go more controversial, he thinks.
“As a consequence, the path for the ECB beyond the July meeting will be highly determined by whether the ECB will be right with its optimistic growth outlook or whether growth will remain sluggish.“
“We still think that the disinflationary process will gain more traction only after the summer and that the current sluggishness of the economy will not yet be sufficient to stop the ECB from hiking one last time in September.”