ECB to decide on interest rates

The European Central Bank (ECB) interest rate decision will draw traders’ attention on Thursday. The ECB’s head Christine Lagarde said last week that “we must continue to take whatever measures are necessary to bring inflation back to 2%. And we will do so.” The ECB has raised interest rates by 3% since July 2022.

Later today, the UK’s Chancellor, Jeremy Hunt, will deliver the budget, outlining the government’s spending plans. Economists suggest that Hunt will announce tax breaks for businesses investing in the UK.

ECB interest rate decision

On Thursday, the ECB’s governing board will announce its decision on interest rates. Some economists suggest that the euro bloc’s central bank will proceed with a 50 basis points rate hike. A report by Reuters regarding a poll among economists noted: “While the median showed the deposit rate peaking at 3.75% it was a view held by only 19 of 60 economists surveyed. Twelve said it would be higher but 29 said it would be lower. The highest forecast was for 4.25%.”

Analysts at ING said that investors should focus on how the ECB is prepared to move forward after the expected rate hike. They note in their report: “Up to now, the ECB has been surprisingly unanimous on rate hikes. Recent comments by ECB officials, however, suggest that the debate at the ECB will become more heated again. While chief economist Philip Lane and others argue for a more cautious approach, which could lead to a slowing of the rate hike pace and a not so far away pause or end, the hawkish camp, currently headed by Isabel Schnabel, argues in favour of further firm tightening.”

A Commerzbank report said that the ECB’s hawkish policy could support the single currency. “At present rates are expected to peak at 3.25% as opposed to at 4% previously. The ECB is likely to keep its options for the future rate path even more open now and will hope that its next decision in May will be held in a less tense market environment,” was noted in the report.

US retail sales contraction in February?

After the US inflation data, the retail sales report is expected to reveal more details about the state of the economy. Market analysts suggest that sales are likely to have contracted by 0.3% on a month-to-month basis in February. It should be noted that US retail sales surged by 3.0% in January.

A CitiBank report went even further, suggesting that “we expect a 0.7% MoM decline in total retail sales in February, after a very strong 3.0% MoM increase in January. Only a 0.7% decline this month does not offset the majority of the strength from last month and suggests that underlying strength in goods consumption while not as strong as January is somewhat stronger than what we would have thought six months ago.”

New Zealand GDP report in focus

Statistics New Zealand is expected to announce figures related to the country’s GDP growth on Wednesday. Economists forecast a 3.3% GDP increase, on a yearly basis, in the last quarter of 2022. On the contrary, New Zealand’s GDP is likely to have shrunk by 0.2% on a quarterly basis. The RBNZ forecasts the economy’s growth to average about 3.9% in 2023 and then drop to 0.1% in 2024.

Economists at ANZ expect a larger GDP contraction in the last quarter. “We’ve pencilled in a 0.3% q/q contraction for Q4 GDP, due next Thursday. That’s weaker than our previously published forecast of +0.3% q/q and the RBNZ’s February MPS forecast of +0.7%. The economy is slowing – just perhaps not at the pace quarterly GDP growth in Q4 may suggest,” they stress in their report. 

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