Next week the Council of the European Central Bank is deciding on key interest rates and the Fed's Open Market Committee will hold its meeting at the end of the month.
While the US could see a bigger rate hike than previously expected, the ECB is likely to continue its hesitant course despite growing criticism. As in the US, households in the European Union are struggling under galloping inflation, rising energy and food costs with lower income groups affected the most.
If central banks are serious about fighting inflation, they must send clear signals that they are also prepared to accept the cyclical consequences of their interest rate policy.
The past two weeks have shown that the central banks are accelerating their interest rate steps in turn. On Wednesday, for example, the central bank of Canada raised interest rates by 100 basis points to 2.5 percent. The hefty rate hike followed a recent inflation rate of nearly eight percent. It was the biggest interest rate move in the country since 1998 - and bigger than experts had expected. Previously, interest rates had already risen by 50 basis points each in April and June.
In Arrears
In Europe, too, the central banks of Sweden and Hungary continued to increase interest rates. Even in Switzerland, the SNB went ahead with a surprise hike in June. In the UK, the Bank of England is on a steady path to higher interest rates.
Only the continent's most important central bank, which decides on interest rates in the 19 euro countries, has so far reacted only by ending bond purchases under the presidency of Christine Lagarde (pictured below). The 25 basis point hike promised for next Thursday's meeting would be another overly hesitant move in light of high inflation, critics are now saying.
(Image: Keystone)
«Inflation is only a temporary phenomenon,» Lagarde had repeated mantra-like and almost defiantly into January, at a time when other central banks had already embarked on a path to increase rates. Her view only changed when consequences of the Ukraine war and the ongoing supply chain problems on global trade and prices became clearer. One thing which is definitely certain now is that inflation was stronger than expected and will continue for longer. Second-round effects via higher wages will also be unavoidable.
Weak Euro
A year ago, the euro exchange rate was still around 1.09 dollars. Now it is below parity. This makes energy and raw material prices, which are already high, even more expensive, and puts a strain on consumers and the economy.
The low euro exchange rate is not only due to concerns about an economic slump in Europe - especially in Germany - as a result of a Russian gas supply freeze. The falling euro rate can also be seen as a sign that the ECB is not likely to act decisively.
Dollar Flight
The weakness of the euro contrasts with the strength of the dollar. On the one hand, this is due to lower economic worries, but on the other hand, it is mainly due to the prospect of further rising interest rates and thus the quality of the greenback as a «safe haven».
In the US, inflation was last measured at 9.1 percent, the highest value in more than 40 years. This record figure had surprised the experts, who had only expected inflation to rise by around 8.6 percent.
The market reaction to this macro data with a rising dollar and capital market interest rates were clear. The FOMC (Fed Open Market Council) meeting on July 26 and 27 is again expected to produce a larger interest rate move. The minutes of the June meeting still indicated an increase of 50 or 75 basis points.
Hard landing
Some economists now think a full percentage point rate hike is possible here as well. «Everything is up for debate,» said Raphael Bostic of the Fed's Atlanta branch, in this regard.
With a steeper rate hike, Federal Reserve Chairman Jerome Powell would risk a harder economic landing than intended, which would mean further strong turbulences in the financial markets.
