Germany has now taken the mantle of being Europe’s weakest link after the UK’s statistic office tweaked its data, but will it impact monetary policy?
| A story much told about Britain is that after COVID-19, its economy was the sick man of Europe. While other countries in the G7 bounced back, the British economy even this year was still smaller than before the pandemic.
The ONS hasn’t suddenly become unreliable – it’s just that because of COVID-19, the data-gatherers didn’t have enough information on business spending until more delayed survey material came in.Still, it’s a pretty extraordinary handbrake-turn in Britain’s economic narrative. Naturally, Chancellor Jeremy Hunt was salivating to tell the new story: “Those determined to talk down the British economy have been proved wrong,” he crowed.
Despite the travails on the home front, Germany’s representatives on the ECB’s rate-setting council are perversely more hawkish than almost anyone else. For them, it’s all about the potential stickiness of inflation. The signs of an alarmingly hard economic landing are not deemed relevant.But markets expect the rest of the ECB’s governing council to take into account the powerful impact of nine consecutive interest-rate increases, which have taken the benchmark to a 22-year high of 3.
Markets ascribe a 79 per cent chance that the central bank will keep rates unchanged at its next policy meeting on September 14. In other words, after 14 consecutive increases, to a 15-year high of 5.25 per cent, it might be time to hold fire for a while. Markets, though, expect the rate to hit 5.75 per cent this year but drop back to 4.25 per cent by 2026.A chart accompanying Pill’s speech suggested that either option would slow inflation, now at 6.8 per cent, to the BoE’s 2 per cent target at about the same pace.
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