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ECB monetary policy meeting preview

ECB monetary policy meeting preview                                             

  • EUR: Citi analysts expect no change in key ECB interest rates this Thursday. With respect to interest rate guidance, the team expects some adjustments to reflect conclusions of the recent Strategy Review and look for the ECB  to link rate hikes to the achievement of price stability, while allowing for some temporary overshooting of the target. Citi analysts also expect some reference to a consistent rise in underlying inflation dynamics though it is much less clear that there will be a consensus on the immediate need for the calibration of asset purchases as there would be a need for a continued high degree of flexibility. It might therefore be easier for the Governing Council to wait until September when updated ECB staff economic projections become available to fine tune the calibration of the response, or even wait until December when the first estimate of 2024 HICP will show whether the post-pandemic rebound and forward guidance adjustments have been sufficient to help with the re-anchoring of inflation expectations.      


NZ: Transient inflation debate heats up as Q2 CPI surprises            

  • NZD: NZ headline inflation increases at its fastest quarterly rate in 10 years by 1.3% in Q2 2021. This almost doubles the rise expected by the market (consensus: 0.7%) and well above Citi’s forecast (Citi: 0.8%). Consequently, the mark-to-market impact of the stronger Q2 CPI result means that Citi analysts raise their NZ 2021 CPI forecast from 2.4% to 2.8% and the 2022 forecast from 2.0% to 2.1%. Importantly, there remains no run-away inflation spiral in the long-term and the CPI forecast for Q4 2022 is a moderate 2.2%, just above the 2.0% CPI midpoint of the RBNZ target band. Overall, Citi analysts believe the RBNZ should hold-fire until after the Q3 CPI print, which will allow for more clarity on what price rises are temporary, providing more time to assess the Delta variants influence on activity and set up the November MPC meeting for rates lift-off.    

  • NZD: Implications for RBNZ monetary policy -  Ordinarily, such a strong CPI increase coming from a mix of sources would be an immediate trigger for a monetary response, particularly when strong demand conditions are now providing an environment for retailers to pass on higher input costs. However, these are not ordinary times with the COVID Delta variant creating downside risks to global growth. And despite having nominally closed borders, New Zealand still received around 90k visitors from overseas in June and the first half of July and only 11% of the population is currently fully vaccinated. Furthermore, monetary policy should not respond to temporary increases in prices. Indeed, the RBNZ said as much in the May MPS where “the MPC does not attempt to offset events that are expected to have only transitory effects on inflation”. As a result, Citi analysts believe RBNZ should hold-fire until after the Q3 CPI print, which will allow for more clarity on what price rises are temporary, providing more time to assess the Delta variants influence on activity and set up the November MPC meeting for rates lift-off.


Data releases Friday      

  • USD: US retail sales strong even as services spending normalizes - retail sales in June advance 0.6%MoM, stronger than expected. The headline reading though is weighed by auto sales, which are held down by supply-chain issues, leaving the control group (which excludes autos) up 1.1%MoM. Citi analysts point to the surprising resilience in goods spending given the rapid rebound in services which should give the Fed more confidence that US economic activity is sufficiently strong to continue their steady march toward tapering asset purchases.            
  • USD: Michigan consumer inflation expectations rise but unlikely to move the Fed  - the main focus of the report is on inflation expectations with 1Yr expectations up to a cycle high of 4.8% (4.3% expected, 4.2% prior) and 5-10Yr expectations also rising to 2.9% from 2.8% previously. Fed Chair Powell in his Congressional testimony last week indicated that - “if inflation expectations move up in a way that is troubling - materially above and for an extended period - we would respond to that.” However, it will take time for the ‘transitory’ vs. sticky’ inflation debate to decisively lean in any particular direction and the July Michigan survey does little to move the needle.  


Week Ahead                    

  • USD: This week’s focus in US will likely turn to fiscal negotiations and the fate of the bipartisan infrastructure bill. It may also not be too early to begin speculating about the outcome of the July 28th FOMC.  
  • USD: Housing Starts – Citi: 1650k, median: 1590k, prior: 1572k; Housing Starts MoM – Citi: 5.0%, median: 1.2%, prior: 3.6%; Building Permits – Citi: 1650k, median: 1700k, prior: 1683k; Building Permits MoM – Citi: -2.0%, median: 1.0%, prior: -2.9% - demand for housing remains strong while supply is constrained by input shortages.  
  • USD: Existing Home Sales – Citi: 6.05m, median: 5.88m, prior: 5.80m; Existing Home Sales MoM – Citi: 4.3%, median: 1.3%, prior: -0.9% - existing home sales have been at strong levels through the pandemic though like housing starts, supply has likely been a significant factor holding back existing home sales in recent months.
  • EUR: ECB board meeting – refer to PP1 - ECB monetary policy meeting preview.  
  • EUR:  Euro area Manufacturing PMI, July Flash Forecast: 63.5 Prior: 63.4; Services PMI, July Flash Forecast: 56.5 Prior: 58.3; Composite PMI, July Flash Forecast: 58.5 Prior: 59.5 – Citi analysts estimate the flash composite PMI will likely fall slightly in July, from the 15-year high of 59.5 seen in June. This would be the first small decline in 6 months. Risks to this forecast are probably also skewed to the downside. 
  • GBP: UK Manufacturing PMI, July Flash Forecast: 62.3 Prior (Final): 63.9 – Citi analysts expect export orders to have improved once again, with new business overall still growing at near record rates. But supply disruption is also likely to have worsened. This could mean a slight moderation in the rate of input cost inflation – though the team expects  selling prices to exhibit strong ongoing growth in July with a further record high possible.
  • GBP: UK Services PMI, July Flash Forecast: 61.9 Prior (Final): 62.4 – Citi analysts expect the rate of growth of UK’s services sector to have fallen back in July. Business services may have picked up marginally, buoyed by further investment among consumer services, however exports are likely to remain a notable weak spot. The team expects these effects to hold back part of the recovery over summer, with wage pressures also likely to have grown further.


This is an extract from the Daily Currency Update, dated July 19, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here -

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