Oct 31 / Alef Dias

Macroeconomics Weekly Report - 2023 10 30

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"One of the key focal points of Christine Lagarde in her speech following the council meeting was the external concern regarding the Israel-Hamas conflict. The escalation of the war has the potential to trigger economic consequences, impacting energy prices in the continent."

Terminal rates arrived in Europe, but cuts are still far away

  • The ECB kept interest rates unchanged in its last meeting. The improvement in inflation and the deterioration in economic activity suport maintaining borrowing costs at their current level.
  • Credit impulse on the continent is still retreating, a signal that a tight monetary policy is helping to bring prices under control. However, the risk of an escalation of the conflict in the Middle East is a concern for monetary authorities.
  • Additionally, another European country is in focus: the Bank of England is expected to announce another rate pause, keeping interest rates at a 15-year high of 5.25%.


Since the COVID-19, Europe has encountered many economic challenges. Disruptions in the supply chain, coupled with the reopening of the economy, have exerted upward pressure on the prices of a wide range of goods and services. Furthermore, the conflict in Ukraine has contributed to elevate energy costs.

The European Central Bank (ECB) rose interest rates by 4.5% since July 2022, making the fastest hike of interest rate in its history. Currently inflation it at the lowest level since October 2021, with annual figures declining to 4.3% in September. However, inflation still remains significantly above the ECB's target of 2%.

Furthermore, inflation dynamics vary across member states, with Germany at 4.5%, France at 5.7%, Slovakia at 8.2%, and Slovenia at 6.86%. While the ECB's rate hikes are expected to bring inflation down over time, it is likely to remain high in some countries for longer than others.

This week will be crucial for Great Britain, as the Bank of England (BOE) is scheduled to release its interest rate decision and macroeconomic projections. The country has the highest inflation in the G7 and is facing economic growth challenges.

Image 1: Major Components of Eurozone Inflation (%)

Source: Bloomberg

ECB maintain interest rates, but energy prices concerns

The sluggish economic growth in Europe have allowed the European Central Bank to find room to maintain stable interest rates. Weaker demand is cooling the labor market and suppressing wage growth, which will ultimately help to bring inflation to the 2% target. Additionally, the credit impulse on the continent has fallen sharply, signaling that businesses and households are borrowing less money, which is reducing the total amount of money in circulation.

Meanwhile, one of the key focal points of Christine Lagarde in her speech following the council meeting was the external concern regarding the Israel-Hamas conflict. The escalation of the war has the potential to trigger economic consequences, impacting energy prices in the continent.

Image 2: Euro-Area Credit Impulse and Interest Rates (%)

Source: Bloomberg, Eurostat

Eurozone countries are mostly net energy importers, relying on external sources to meet their energy needs. Data shows that the main energy product imports in 2021 were petroleum products (including crude oil), followed by natural gas and solid fuels.

Hence, in the event of a substantial increase in energy costs, there is a potential for a decline in consumer disposable income and reduced competitiveness for businesses. This impact has already been witnessed in the manufacturing sector of the Eurozone (as shown in Chart #3) since last year, following Russia's invasion of Ukraine.

Image 3: Eurozone PMI by Sector

Source: Refinitiv

Crucial week for another European country

Britain has faced higher inflation than other countries, partly due to rising food and energy costs. However, its job market is weakening, as evidenced by falling vacancies, and weak demand in the country could ultimately affect GDP growth.

Considering the complexity of the economic environment, it is expected that the Bank of England (BOE) will announce the retention of the country's interest rates at 5.25% on Thursday for the second consecutive meeting. Among the G7 countries, the United Kingdom is facing the most severe inflationary challenges.

Image 3: G7 Inflation Rates (%)

Source: Refinitiv

In Summary

Payroll data came in almost double what was expected in its latest release, generating uncertainty about the inflationary trajectory for the rest of the year. A robust labor market as it is now should bring a stronger expansion of economic activity, which could put pressure on inflation.

This possibility continues to be absorbed by the market, which is positioning itself as more economic data is released and seeking to anticipate a possible interest rate hike in November, which brings an upward sentiment to the yields of US Treasury bonds.
In this sense, the recent approval of a bill by the US House of Representatives allows the financing of federal institutions for an additional 45 days, averting the risk of not publishing economic indicators and allowing more data to reach the public and, in particular, the Fed.

Meanwhile, emerging countries, in particular Brazil, continue to see a depreciation movement due to the external situation that points to a decrease in the interest rate differential paid between their currencies and the dollar.

Weekly Report — Macro

Written by Victor Arduin
Reviewed by Alef Dias


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