Markets
EUR/GBP spiked from 0.8325 to 0.8375 following September UK inflation numbers, but the euro isn’t strong enough these days to profit from GBP-weakness. Even as UK yields drop 8 bps (30-yr) to 11 bps (2-yr) across the curve. Headline inflation was flat in M/M-terms, resulting in the first sub-2% inflation print since April 2021. As is for Europe and the ECB, inflation is expected to move back above the BoE’s 2% inflation target toward year-end as energy base effects switch signs. Transport-related prices (petrol prices,…) and services costs (-0.3% M/M; mainly airfares) were the main monthly negative contributors. Core CPI slowed to 0.1% M/M and 3.2% Y/Y (from 3.6% Y/Y; lowest since September 2021). Services inflation recorded a first below-5% Y/Y figure since May 2022 (4.9% from 5.6%), again mainly because of the volatile airfare component. Core services inflation likely slowed less, from 5.5% Y/Y to 5.3% Y/Y, warning against overinterpretation of today’s numbers. In combination with yesterday’s waning wage pressure, they nevertheless suffice for the Bank of England to pursuit governor Bailey’s more activist approach. The parallel with the ECB remains. The BoE started off with a 25 bps rate cut in August (albeit a close 5-4 call), next skipped a meeting in September, to make monetary policy again less restrictive in November (25 bps rate cut discounted). Backed by a new Monetary Policy Report, the market expects the BoE to prepare the road for more regular rate cuts from there on. The UK government’s 2025 budget (presented at the end of the month) is a wildcard, but we don’t expect it to derail the BoE’s plans.
Trading on main European and US markets is uneventful, counting down to tomorrow’s ECB policy meetings and US weekly jobless claims and retail sales. Core bonds regain some additional ground with German Bunds outperforming US Treasuries in the process. Brent crude prices hold near the recent sell-off lows around $74/b while EUR/USD treads water just below 1.09. European stock markets (-0.5%) fail to recover from yesterday’s ASML-triggered setback. Key US indices start the session fairly mixed.
News & Views
The Economic Experts survey, a quarterly study conducted by the Ifo Institute and the Swiss Economic Policy Institute, shows that experts from around the world expect inflation rates to remain above central banks’ targets. Ifo researcher Niklas Potrafke concludes that “due to these stagnating inflation expectations, central banks could hold back on further interest rate cuts.” Worldwide, inflation could reach 4% in 2024, 3.9 % next year and 3.6 % in 2027. Inflation expectations for 2024 in Western Europe (2.5%) and North America (2.7%) are well below the global average. For 2027, experts still expect 2.1% in Western Europe and 2.4% in North America. In other parts of Europe, inflation expectations for 2027 are higher: 2.7% for Northern Europe, 3% for Southern Europe, and 5.9% for Eastern Europe. Among the regions with particularly high inflation expectations of more than 20% are South America and large parts of Africa.
Czech National Bank (CNB) board member Holub explained why he dissented at the September 25 monetary policy meeting. At that meeting, the CNB decided to cut the policy rate by 25 bps to 4.25%. Holub voted for a 50 bps reduction. Holub’s risk assessment is slightly more anti-inflationary while the Board in general sees risks to meeting the inflation target as mainly balanced. Current inflation and the near target outlook combined with moderate downside risks, according to Holub allow a forward looking approach to monetary policy with the focus on the medium term. Finetuning on the basis of incoming data is less appropriate given lags in the transmission of policy. At the same time, the economy is developing below potential and is recovering slowly. Fiscal policy has been restrictive throughout the year, hampering the economic recovery, in particular household consumption. Fed and ECB cuts are reducing the risk of a significant weakening of the korona even as domestic demand is weak. In this context, Holub sees risks that the negative effects of an excessively tight monetary policy would result in lower growth and inflation easing below target. Holub still votes at the November 7 meeting, but leaves the board in December. KBC expects the CNB to cut rates at the 3 upcoming meetings to 3.5% in February when a longer pause might kick in or what even might be the’ low’ of the cycle.
 to 11 bps (2-yr) across the curve. Headline inflation was flat in M/M-terms, resulting in the first sub-2% inflation print since April 2021. As is for Europe and the ECB, inflation is expected to move back above the BoE’s 2% inflation target toward year-end as energy base effects switch signs.){kind=link}