Week ahead: Inflation steals show as ECB & BoC speak

Inflation is everywhere this week. Two major central bank rate decisions, from the European Central Bank and Bank of Canada, are due as inflation starts to bite. Looking at data, the big release is May’s US CPI numbers following April’s surging prices.

Starting with the ECB, higher-than-expected inflation in May means the central bank’s inflation target has been breached.

Eurozone inflation hit 2% for the first time this year in May. The ECB’s policy mandate is to keep inflation close but below that level. Previously, the ECB had predicted that inflation will peak 2% in the last quarter of 2021, then coming down throughout 2022.

Will the fact the 2% target has been reached force a change?

Moody’s doesn’t think so. The ratings agency believes no rate hike will come for several years at least, despite the recent pick up in inflation.

“After economic activity resumes as normal, the inflation rate will likely start to weaken in the second half of 2022 as the effects of one-off price increases begin to disappear from inflation data,” Moody’s said.

While no rate change is forecast, markets will still be watching closely to see if there are any tweaks in ECB policy at Wednesday’s press conference.

The central bank’s more hawkish council members have been hoping for a relaxation of PEPP, the EU stimulus package, by the second half of 2021. Certainly, if inflation continues to mount, then the bank may be forced to make a change. It all depends on economic conditions from here on out.

“The envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation,” the ECB said in a statement following May’s meeting.

Contrasting with the cautious ECB, the Bank of Canada is a bit of a Covid economics trailblazer. It’s the first central bank to actively begin paring back its bond buying programme and could be one of the first to raise its central bank rate.

That said, the 0.25% rate probably isn’t moving in June. A rate hike will come in H2 2022 at the earliest. June’s statement, by all accounts, is gearing up to be more of a preview of July’s potential changes.

Inflation is still being carefully monitored. In April, inflation was at the higher end of the Bank of Canada’s 1-3%, so economic conditions may force Canada’s central bank’s hand to move a little quicker on rates if we see similar action when May’s data is reported.

At this time a rate hike is unlikely. Instead, the focus is on QE.

According to Reuters, analysts across six of Canada’s top retail banks believe the BoC is gearing up to further slow bond purchases. Forecasts estimate bond buying to be scaled back to C$2 billion ($1.65 billion) per week from the current level of C$3 billion per week next month. Further reductions could come in August.

Looking at data, the May US Consumer Price Index printing is released on Thursday. As a key inflation metric will be carefully monitored by the markets, following April’s higher-than-expected reading.

Economists surveyed by Dow Jones were anticipating a 3.6% CPI rise last month. The final reading clocked in 4.2% year-on-year – the fastest rate of growth since 2008.

Much of this was from baseline economic factors, rather than completely spiralling inflation. Prices in April 2020 had fallen through the floor thanks to the first wave of lockdowns. As the US economy strengthened, consumer prices have risen too.

As such, the Fed called April’s numbers “transitory” and is still sticking to the script. The Federal Reserve believe inflation will cool off as the year progresses, falling back to its targeted 2% level.

But if a similar reading comes in May, the Fed may be forced into action.

Major economic data

Key earnings data