The European Central Bank (ECB) council will meet in Frankfurt on Thursday to discuss the path forward for the eurozone. The ECB has so far been slower to tighten than other central banks – with the deposit rate still at minus 0.5 per cent.
Recent communications suggest the ECB is now ready to start tightening economic conditions to tackle rising inflation. However, the central bank is still cautious about the underlying economy, and interest rates might not be raised at the June meeting. Instead net asset purchases are expected to end then to allow a 'rate lift-off' at the meeting in July. If inflation settles above 2 per cent then further rate rises will follow.
The US Federal Reserve, which has already acted by increasing the Federal funds rate to 1 per cent this year, will find out if this is influencing inflation when CPI data is released on Friday. US price growth may indeed have peaked, having fallen 20 basis points on annual basis in April to 8.3 per cent. And recent disappointing numbers out of big US retailers Walmart and Target suggests demand for goods is cooling.
The big drop off in new US home sales in April also implies inflation could be slowing. New home sales fell 16.6 per cent on a seasonally adjusted annual basis to 591,000. Housing makes up 4 per cent of the economy and houses prices are yet to move downwards. However, lots of retail sale components such as furnishings and building materials are strongly correlated with new home sales. Fewer new houses mean less demand for these products and therefore slowing price growth.
The UK will get a better understanding of how interest rate rises are effecting its housing market, following on from this week's Nationwide data, when Halifax releases its house price index. In April, annual growth was 10.8 per cent, down slightly from 11.1 per cent in March. With the economy slowing and interest rates rising, it is likely the rate of house price growth will continue to slow as the year progresses.
Chancellor Rishi Sunak’s new £15bn fiscal support package may also empower the Bank of England to increase interest rates further. This support will lower the risk of immediate economic recession, but with inflation already elevated it could yet tip the balance too far in the opposite direction – to counter this further rate rises might be needed. Good news for the poorest may not translate into similarly good news for homeowners.
