The RBA will continue to tighten monetary policy. Germany’s economy is already in recession

The Federal Reserve is going to raise interest rates on Wednesday but is unlikely to raise them by 100 basis points, the CFRA reported Monday. On the other hand, Federal Reserve Chairman Jerome Powell explicitly warned in a speech last month that the Fed’s effort to rein in inflation by aggressively raising interest rates would “bring some pain” to the economy. Another sign of the Fed’s growing concern about inflation could be that it plans to raise rates much higher by the end of the year than predicted three months ago and to hold them higher for a longer period. Economists expect the US Federal Reserve’s key rate could rise to 4% by the end of this year. That said, there is a high probability of a rate hike to 4.5% next year. Most economists expect the Fed to stop raising rates in early 2023.

Economists believe a recession in the eurozone is almost inevitable. Households and companies in Europe are preparing for the possibility of energy rationing after Russia restricted gas supplies to the region and are already grappling with record-high inflation and other supply bottlenecks. Business surveys show that activity has been declining since July, and there are few signs of improvement in the near term. President Christine Lagarde and her colleagues are justifying higher price increases as a sign of their determination to tame rising prices, although economists believe their time for such action is running out. Respondents now see the ECB pausing its rate hike cycle early but raising interest rates to a peak of 2% on the deposit rate by February. More than half expect a 75 basis point increase at the ECB’s next meeting in October.

Germany’s Central Bank warned that the economy has already entered a recession. The Bank said business activity could decline slightly in the current quarter and fall markedly in the fall and winter months, even if strict gas rationing can be avoided as industry cuts or freezes production. Germany’s energy supply problems became especially acute after Gazprom cut gas supplies through the Nord Stream 1 pipeline, after which the pipeline was completely shut down.

Oil prices are rising as China’s easing of quarantine fuels demand hopes. Chengdu, a major Chinese city of about 21 million people, reopened after a two-week quarantine.

Australia supported a G7 price cap on Russian oil. The treasurer said there would be no downside to limiting the price of Russian oil imports, but the move could limit its ability to finance the invasion of Ukraine. The G7 countries – the United States, Japan, Germany, United Kingdom, France, Italy, and Canada – agreed to set a price ceiling on Russian oil imports in early September. The price cap is expected to fall between $40 and $60 a barrel.

Asian markets traded lower yesterday. Japan’s Nikkei 225 (JP225) decreased by 1.11%, Hong Kong’s Hang Seng (HK50) lost 1.04% on Monday, and Australia’s S&P/ASX 200 (AU200) was down by 0.28% on the day.

The national CPI rose to 2.8% y/y (2.6% previously), the highest reading in 8 years. And while inflation remains above the 2% target, the Bank of Japan cannot be expected to suddenly abandon its ultra-soft monetary policy. Analysts predict that no changes in the monetary policy of the Bank of Japan should be expected before the end of the year.

The RBA minutes of the monetary policy meeting showed that the RBA expects inflation to peak by the end of this year, after which inflation will fall to the target range of 2-3%. The Bank’s main forecast was for CPI inflation to be around 7.75% in 2022, just above 4% in 2023, and around 3% in 2024. The outlook for global economic growth has worsened and caused key uncertainty. Central banks in several major advanced economies have expressed further resolve to tighten monetary policy to prevent high inflation from taking hold, and this will likely entail a period of much lower growth.