Can central banks get inflation under control without pushing the economy into recession? Recent developments point to further interest rate hikes in the US and the eurozone, while the SNB has the luxury of waiting and seeing.

A look at the stock markets at the end of the week proves it: investors are expecting further interest rate hikes in the US and the eurozone, while at the same time prices on the stock markets have corrected downward. While the Fed meeting minutes provided tangible evidence for the interest rate path, for the eurozone, inflation, which continues to be well above the target level, is seen as the main motivation for a resumption of rate hikes in July.

The Fed Minutes show that at the last interest rate meeting of the US Federal Reserve, the majority of the members of the Open Market Committee were in favor of at least one or even two further interest rate steps. A bitter pill for the interest rate optimists.

No End in Sight

According to Credit Suisse, market participants are now expecting higher interest rates in the US for an extended period and are pricing in another rate hike in July and don't expect a rate cut before June 2024.

On Friday the Bureau of Labor Statistics reported the US economy added 209,000 non-farm jobs in June, which was softer than the 230,000 median in a Bloomberg survey. But wage pressure was evident in the report which showed average hourly earnings increasing 0.4 percent on a monthly basis in June, after they declined 0.1 percent in May. 

The increase in earnings will likely underpin the argument the pause in June was just that and that another hike will come on July 26.

Jordan is At the Ready

For the Swiss National Bank (SNB), the pressure to raise rates to combat inflation has eased, with consumer prices rising a more moderate 1.7 percent in June compared to 2.2 percent in May. Both the overall inflation and the core rate are back below the 2 percent mark by the middle of the year.

SNB President Thomas Jordan has time before the Governing Board has to decide on its September monetary policy assessment.

But as Raiffeisen economist Alexander Koch writes, the SNB doesn't trust inflation just yet. In June, price pressures were again found to have increased, and projections continue to assume inflation slightly above the targeted range of 0 to 2 percent in the medium term.

Even if upcoming data confirm easing price developments, the inflation-driving effects of rising rents, renewed electricity price hikes, and a higher VAT rate coming at the end of the year seem more likely to prompt the SNB to remain vigilant, Raiffeisen says. In addition to raising interest rates, the SNB will continue to use foreign exchange sales as a means to further curb imported inflation.

ECB Eyeing Wages and Margins

At the European Central Bank (ECB), the hawks are likely to be in the majority for the rate decision on July 27, despite clear signs of an economic slowdown and rising fears of recession.

The ECB will not hesitate to act if a simultaneous rise in corporate profit margins and wages comes to bear, President Christine Lagarde said in a recent interview with the French regional newspaper «La Provence.» There is still work to be done to bring inflation under control, she said.

«A simultaneous increase in both areas would increase inflation risks, and we would not stand idly by in the face of such risks,» Lagarde said

Schwyzer Kantonalbank also expects central banks to continue raising rates, writing that it's unlikely that money watchdogs will hold out the prospect of interest rate cuts in the near future, or that the peak of the current rate hike cycle has been reached.