Key facts
- The European Central Bank is expected to raise interest rates by 25 basis points on Thursday.
- Rising oil and gas prices are a primary driver for the expected rate hike.
- August's euro zone inflation was above 3%.
- Markets anticipate a 75% chance of a further ECB hike to 3.0% by December.
- U.S. inflation data and a European Central Bank meeting are key events this week.
- Bond yields have surged globally, increasing borrowing costs.
The European Central Bank is widely expected to implement a 25 basis point interest rate hike on Thursday, a move described as an 'insurance' move due to rising oil and gas prices and persistent inflation concerns. August's inflation data showed a rise above 3% in the euro zone. Markets have priced in the September rate hike, bringing the deposit rate to 2.5%, and anticipate a 75% chance of another increase to 3.0% by December. Policymakers are unlikely to signal further rate increases beyond September.
Globally, bond yields have been surging across regions and maturities, increasing borrowing costs for governments, businesses, and households, and challenging stock market valuations. This surge is driven by factors including higher energy prices due to the war in the Middle East, which has lifted inflation expectations and led traders to brace for more rate hikes. In Japan, 10-year bond yields have risen above 3% for the first time in three decades, sparking discussions about potential shifts in Japanese capital from overseas markets.
In the U.S., upcoming inflation reports, including producer prices and consumer price index data, are crucial for the Federal Reserve's decision on interest rates. Markets currently see around a 60% chance of a September rate hike. Meanwhile, Senegal is preparing for an IMF bailout due to over $10 billion in previously unknown debt, leading S&P to cut its long-term foreign-currency rating.