Inflation numbers across the US, UK, Eurozone and Canada form the main theme for this week with the question being whether the Central banks in question will ignore the current deflationary pressures as being a temporary weakness and instead opt for a wait and watch approach before tweaking monetary policy further or if the Central banks will give into the current slump and take a more accommodative policy stance.
Starting off the week, Eurozone’s CPI numbers released today provided some relief with the annualized Core CPI rising 1.1%, up from 1.0% a month ago. The 1.1% increase in CPI marks the highest since January this year ever since the ECB launched its QE program. However, despite the increase, ECB’s Vice President Vitor Constancio came out with the dovish rhetoric a few minutes after the CPI release, noting that the ECB could look into additional easing at the meeting in December. There is speculation that the ECB could rather opt for further deposit rate cuts than having to dig into its QE arsenal.
While the exchange rate has been repeatedly cited as not being a policy tool, the ECB is of the view that a weaker exchange rate is a policy transmission mechanism.
The Euro had managed to recover ground after initially losing to the US Dollar earlier this year and it was only at the previous ECB meeting where Draghi’s dovish comments sent the Euro plunging lower. Regardless, the key to the ECB’s policy easing question would come out of the inflation forecasts than anything else, which is likely to keep the markets guessing.
Unlike the ECB, the US and UK Central banks face the opposite dilemma which are expected to hike rates. While the Bank of England recently lowered its inflation forecasts expecting headline inflation to stay subdued at 1.0% into 2016, the US Federal Reserve has taken on a hawkish tone despite inflation staying low.
More details will emerge when the US consumer inflation numbers are released tomorrow. The British Pound fell sharply after the BoE’s inflation forecasts as the markets were pricing in an earlier rate hike in 2016 which were pushed back to 2017.
With the US unemployment rate down at 5.0%, the pressure builds up on the Federal Reserve as the FOMC members are likely to see through the current weakness in US consumer inflation. Adding weight to this view will be the FOMC meeting minutes which is due later in the week. The main question for the Fed and obviously the markets will be whether the downtrend in commodity prices is merely transitory or if there is something more fundamental.
Besides, the BoE and the Federal Reserve, Canada’s inflation numbers are also due out on Friday. The Bank of Canada left interest rates unchanged at its previous meeting and the monetary policy is likely to remain unchanged into the foreseeable future, at least until the Fed acts in December.
