Take Two: ECB hikes rates again; US economic growth rebounds

What do you need to know?

The European Central Bank (ECB) raised interest rates by 75 basis points (bp) for the second month in a row, bringing the benchmark deposit rate to 1.5% – its highest since 2009. The move reflects the ECB’s continued focus on cooling inflation, at a record 9.9% year-on-year in September. The bank’s President Christine Lagarde acknowledged the risk of recession in the Eurozone, prompting markets to consider a less aggressive rate outlook. The ECB also moved to reduce its €8.8trn balance sheet by cutting a subsidy on the key liquidity facility to commercial banks. Elsewhere, the Bank of Canada opted for a 50bp hike, bringing its policy rate to 3.75%, while the Bank of Japan maintained its accommodative stance and kept its policy rate to -0.1%.

Around the world

US economic growth was at an annualised 2.6% in the third quarter (Q3), ahead of expectations and a sharp swing back from the 0.6% drop in GDP during Q2. Coupled with a 1.6% contraction in the previous quarter, that Q2 number had fuelled speculation the country might be in recession. The rebound over the July to September period was driven by a decline in the trade deficit, meanwhile consumer spending growth slowed to 1.4% from 2% a quarter earlier. That is likely to reflect the US Federal Reserve’s (Fed) aggressive rate hikes, designed to keep a lid on rising prices, with another large hike on the cards for this week.

Figure in focus: 3.9%

The Chinese economy grew 3.9% in Q3 on an annualised basis, picking up from the 0.4% growth recorded in Q2 and beating market forecasts. The rebound follows a range of economic support measures from the Chinese government, alongside strong manufacturing output. Separate data showed evidence of a mixed recovery with slowing export growth, rising joblessness and easing retail sales growth. Equity markets in Hong Kong and Shanghai, meanwhile, have softened since President Xi Jinping announced a new leadership team after his election for an unprecedented third term at the Communist Party Congress.  

Words of wisdom:

Emissions gap: An expression of the difference between predicted greenhouse gas emissions in 2030 and where they should be to avert the worst impacts of climate change. The 13th United Nations Emissions Gap Report found that pledges since the Glasgow COP26 meeting last November have made a negligible difference to predicted 2030 emissions, with “no credible pathway” currently in place to meet the goal of limiting warming to +1.5°C from pre-industrial times. The International Energy Agency, meanwhile, suggested increased renewables investment since the invasion of Ukraine meant peak emissions could now arrive in 2025, earlier than previously predicted. COP27 will begin in Egypt on 6 November.

What’s coming up

This week several central banks convene to decide on monetary policy, beginning with the Reserve Bank of Australia on Tuesday, followed by the Fed and Bank of England on Wednesday and Thursday respectively. Flash estimates for Q3 Eurozone economic growth and the bloc’s October inflation rate are reported on Monday, while composite purchasing manager indices (PMIs) covering China, India and the US during October, are published Thursday – when the Eurozone’s unemployment rate during September is also published. The Eurozone publishes its own composite PMI on Friday, when the US updates markets with its employment numbers for October.