It has been a big week in the EU with plenty of data and political action. The ECB has increased interest rates by 0.5%, the first rate rise in the Eurozone since 2011. It comes at a time when inflation has hit record highs of 8.6% and the economic gulf between member states is widening. The ECB is lagging behind in the interest rate cycle with the US Fed expected to rise by another 75 basis points next week.
Eurozone business activity, as shown by composite PMI, fell to a 17-month low as output and new business orders fell for the first time since the 2021 lockdowns. As the outlook worsens, the Euro initially rose against the dollar before later falling to $1.015, continuing the struggle around parity.
In Italy, PM Mario Draghi resigned from the national coalition after three large parliamentary parties boycotted a confidence vote in his leadership. Draghi had tried to resign earlier in the week as the coalition began to fall apart and snap elections have now been called for the 25th September.
This news dampened Euro gains surrounding the ECB decision as there are now concerns for Italy’s ability to meet conditions to access further COVID-19 recovery funds. As the Eurozone teeters on the edge of recession, the gap between German and Italian bond yields continues to widen with Italian inflation at 8%.
The ECB also announced a new tool, the transmission protection instrument (TPI) which will allow the ECB to focus its bond-buying on the government debt of struggling Eurozone countries. The TPI aims to reduce the gap in borrowing costs between member states and will help to foster economic cohesion as the area continues to fight against recession.
The dual fight against recession and inflation continues around the world. In Japan, interest rates were unchanged on Thursday even as inflation rises above the BOJ’s 2% target. Japan is looking to encourage recovery from the pandemic and the resurgence of inflation and growth is good news for a country that has struggled with deflation for over a decade.
In Canada, inflation for June was at 8.1%, below the forecasted 8.4% as higher petrol prices bite. Last week the Bank of Canada increased rates by a full 100 basis points while the Canadian dollar traded down at $0.7769 against the greenback.
UK inflation continued to lead the G7 as it hit another 40-year high of 9.4% in June. The new figure eclipsed expectations of 9.3% and was driven primarily by rising petrol prices and food prices which rose 9.8% on last year, the largest increase since 2009. Retail sales also fell for the second consecutive month as consumers feel the rising prices.
Inflation is expected to peak around 12% in October of this year and both Chancellor Nadhim Zawahi and BoE Governor Andrew Bailey reaffirmed that tackling inflation was a core priority while speaking at Mansion House on Tuesday. Bailey again suggested that a 0.5% interest rate rise was on the table in August and that the Bank would expedite the reduction of bonds held on its balance sheet.
Inflation worries may receive some respite as a deal has been announced to allow Ukrainian grain shipments. Russia has blocked the Black Sea port that is crucial for Ukrainian exports since the start of the war. An estimated 22 million tonnes of crops will be released which are expected to relieve food prices that have been rising since the war began. Ukraine is the fifth-largest exporter of wheat globally and export restrictions have hit Africa and the Middle East particularly badly.
The war continues to have a significant impact in Europe. The latest plan by EU states to cut gas usage by 15% in order to stockpile supplies for winter has met opposition from Spain and Portugal along with other countries. Concerns over Russia cutting off energy to supply have led to fears of a freezing winter and continued energy price inflation. It is crucial for EU members to agree an economic solution that balances avoiding a recession with avoiding a fuel shortage.
Boris Johnson held his last PMQs on Wednesday as Parliament heads for its summer break. He signed off from the despatch box with ‘Hasta la vista, baby’ before being applauded out of the Commons.
To close on a lighter note, for the first time in thousands of years, Bison are now roaming freely in the UK. A project in Kent has seen three Bison released into the wild this week. The Animals were previously hunted into extinction on the British Isles but will soon be roaming free over 500 hectares of south-eastern countryside. If it proves successful, the project could be further replicated around the UK.