Take Two: ECB delivers record interest rate hike; oil price back to pre-Ukraine crisis levels

What do you need to know?

The European Central Bank (ECB) raised its benchmark interest rates by a record 75 basis points (bp) and signalled there were more hikes to come as it seeks to keep a lid on rising prices. The deposit rate rose to 0.75% from 0% while the main refinancing rate moved to 1.25% from 0.50%. ECB President Christine Lagarde said the unanimous decision was an attempt to “frontload” a push towards rates which would bring the central bank’s 2% inflation target within reach. The ECB also raised its inflation forecasts and now expects 5.5% for 2023 against 3.5% previously, falling to 2.3% in 2024. It sharply downgraded the GDP growth projection for 2023, to 0.9% from 2.1% predicted in June.

Around the world

Growth in the US services sector offered more evidence that the economy was in better health than implied by the previous two consecutive quarters of negative growth – a technical recession. The Institute for Supply Management’s (ISM) non-manufacturing Purchasing Managers’ Index – an indicator of business activity – edged up to 56.9 in August from 56.7 in July, reflecting stronger order growth and employment, and an easing of supply chain bottlenecks. The composite index showed growth for the 27th consecutive month, ISM said. Stronger economic data and the expectation of further interest rate rises helped the dollar strengthen against several major currencies last week.

Figure in Focus: $90

Brent crude oil prices fell below $90 per barrel for the first time since Russia’s invasion of Ukraine on the back of weak economic data from China, expectations of further interest rate rises and a possible global recession. The drop in oil prices came despite a decision by OPEC+ to reduce oil output by 100,000 barrels a day. Meanwhile gas prices remained elevated as Russia shut its key Nord Stream 1 pipeline into Europe. Several countries have already announced plans to support households and businesses in face of soaring energy prices.

Words of Wisdom:

Reserve Requirement Ratio: The ratio of a bank’s legally required minimum capital reserves against its on-demand deposits. Last week, the People’s Bank of China (PBoC) announced it would cut the Reserve Requirement Ratio (RRR) for foreign exchange deposits to 6% from 8% in a move seen as an attempt to slow the yuan’s depreciation after it tumbled to two-year lows against the dollar. It follows a 100bp cut in the foreign exchange RRR in May – though China’s central bank raised the ratio twice last year to slow the yuan’s rapid appreciation. Since then, the currency has suffered from fears over domestic demand and elevated US-China tensions.

What’s coming up?

UK economic growth data for July is published Monday, while its latest unemployment numbers follow on Tuesday, when the US announces its inflation numbers for August. The UK follows with its own inflation update on Wednesday, when Eurozone industrial production numbers for July are also reported. On Friday the Eurozone updates the market with its final inflation estimate for August.