The Eurozone is expected to raise interest rates this week, positioning the European Central Bank at the forefront of a global monetary tightening wave triggered by conflict. Markets widely anticipate a 25-basis-point increase from the ECB on Thursday. This would be the most significant move yet among major developed economies, as previous similar tightening actions have occurred in smaller economies like Australia and Norway. Unless ECB President Christine Lagarde and her colleagues deliberately surprise markets, the region's monetary policy is set to remain on a tightening path, with at least one more rate hike expected before year-end.
While observers expect the Bank of Japan to follow suit later, albeit from a much lower base rate, other G7 central banks currently show less appetite for raising borrowing costs. Just ahead of the ECB's decision, the Bank of Canada will likely hold its benchmark rate steady at the level maintained since last October. Later this month, the U.S. Federal Reserve and the Bank of England are also highly probable to keep policy unchanged, continuing to assess the fallout from geopolitical tensions.
The ECB's response, aimed at the energy shock stemming from recent conflict, is fundamentally about ensuring the Eurozone's worst inflation since 2023 does not become entrenched. However, their tightening measures will come at the expense of economic growth in a region where the underlying recovery is already fragile. The trade-off between fighting inflation and supporting growth will become more acute if policymakers insist on further tightening. The ECB will also publish different scenario analyses of how the shock is evolving within the Eurozone alongside its quarterly economic projections, which Lagarde will explain in her post-meeting press conference.
Economist Simona Delle Chiaie noted, "Lagarde's communication on the rate outlook in March caused market confusion. This time, she may offer some hints on the ECB's next steps. We expect her to signal more clearly than before that a second hike is already in preparation."
This week, other regions will also begin tallying the economic impact of the war, with key data releases including inflation figures from the U.S., China, and India. Here is a detailed look at the global economic highlights:
United States and Canada
Following a much stronger-than-expected U.S. jobs report for May, market focus shifts back to inflation. The U.S. Consumer Price Index for May, due Wednesday, is forecast to climb 4.2% year-over-year, marking the highest increase in over three years. The core CPI, excluding food and energy, is expected to show slight cooling on a monthly basis, potentially offering a positive signal for Fed policymakers. Thursday's Producer Price Index will further reveal the conflict's profound impact on supply chains. Economists are closely watching components within the PPI report that feed into the Personal Consumption Expenditures price index, the Fed's preferred inflation gauge, due later this month.
Other reports include existing home sales data for May on Tuesday and the preliminary University of Michigan Consumer Sentiment Index for June on Friday. Fed officials entered their pre-meeting quiet period on Saturday, ahead of new Chair Kevin Warsh's first Federal Open Market Committee meeting on June 16. In a Sunday interview, the U.S. President stated that a Fed rate hike would be a mistake, attempting to dampen market expectations that the hot jobs report might force the Fed's hand.
In Canada, the central bank is expected to hold its key rate at 2.25% for a fifth consecutive time. The country is struggling to balance energy-driven inflation against potential economic weakness from U.S. tariffs. Wednesday's rate decision won't include updated economic forecasts, but Governor Tiff Macklem is expected to comment on recent data showing the economy contracted in Q1 but showed signs of rebounding in Q2, including an unexpected surge of 87,800 jobs in May. Meanwhile, April merchandise trade data may show a further widening of the trade surplus.
Asia-Pacific Region
The data calendar in Asia will be dominated by price trend updates. Following its fastest inflation in a year for April, India's consumer inflation for May likely accelerated further, driven by food prices. Despite government measures to curb fuel costs, this will add pressure on the Reserve Bank of India to consider a rate hike at its Monetary Policy Committee meeting on August 5. Cash rates in India and Indonesia are already the highest in Asia.
In Japan, with the Bank of Japan in its quiet period ahead of its policy meeting, Wednesday's PPI data may show corporate cost pressures remained elevated in May, after input prices rose at their fastest pace in 14 years during April. This will further fuel market expectations for a BoJ rate hike on June 16. Elsewhere, Japan will release revised Q1 GDP figures on Monday, with economists expecting a downward revision after weaker-than-expected capital investment data. New Zealand's May manufacturing PMI, due Friday, has remained in expansion territory (above 50) since last July but has edged closer to the 50 threshold each month for the past four months.
Sentiment surveys include consumer confidence readings from Indonesia and Thailand, and Australia's latest NAB business confidence index, which has been mired below -20 in March and April. Trade data from Taiwan and mainland China are also due this week. Meanwhile, investors will watch for any actions by policymakers across Asia to stabilize their currencies amid geopolitical tensions, rising energy costs, and a strong U.S. dollar. South Korea on Sunday announced a series of targeted measures to ease depreciation pressure on the won, which had fallen to its lowest level since 2009.
Europe
Beyond the widely expected Eurozone rate hike, local data across Europe will draw significant attention. In Germany, factory orders on Monday and industrial production and trade data on Tuesday will vividly illustrate the actual impact of the conflict on Europe's largest economy at the start of the second quarter. The Bundesbank will release new economic forecasts this weekend, coinciding with final inflation figures for Germany, France, and Spain. A slight uptick in German business optimism was noted recently.
European finance ministers meet in Luxembourg on Thursday and Friday, shortly after Brussels granted member states more budgetary flexibility to cope with high energy prices linked to the conflict. Italy, which pushed hard for this change, announced on Sunday it would extend its fuel tax cut for consumers until July 3.
United Kingdom
With Bank of England officials in their quiet period ahead of next week's rate decision, the UK's focus will be entirely on data. April GDP figures on Friday are expected by economists to show the first contraction in eight months. Turning to Scandinavia, Norway's inflation data may show underlying price growth has accelerated further above 3% year-over-year. Concerns over inflation pressures previously prompted Norges Bank to implement its first rate hike since 2023.
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