US faces more interest rate rises to cool inflation

August 29, 2023

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US faces more interest rate rises to cool inflation

The US Federal Reserve chairman has said the central bank will continue to raise interest rates "if appropriate" as inflation remains "too high".

Jerome Powell told an annual gathering of central bankers that the pace of price rises had fallen from a peak.

However, it remains above the Fed's 2% target. In the latest data provided by the Federal Reserve, it;s chairman Jerome Powell said interest rates could rise further and stay higher for longer.

US inflation hit 3.2% in the year to July while the key interest rate is 5.25% - the highest in 22 years - and comes after 11 consecutive rate rises since early 2022.

Many in the Federal Reserve believe inflation has moved down from its peak, but it still remains too high.

This development comes as food and energy prices remained volatile, despite headline inflation falling from its high of 9.1% last year.

The latest data also points to the housing market, where activity had not cooled enough. After decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up towards its previous target, but monetary policies will need to remain firm.

The newest available data also hinted that interest rates could begin to come down, if there were required changes in the labour market, where wage growth has continued as employers dished out higher wages to attract staff in a slowly shrinking workforce.

Higher wages, in theory, add to inflation, prolonging the need for higher interest rates.

IMF forecasts German economy to shrink towards the end of 2023

The International Monetary Fund forecasts the German economy will shrink in 2023, therefore making it the only G7 economy to contract this year.

Sticky inflation and three straight quarters of stagnating output have put Europe’s biggest economy into an unfavourable position towards the end of 2023.

The latest IMF forecast currently predicts  the nation to be the only advanced economy to shrink this year — with a forecast contraction of 0.3% compared with an average rise of 0.9% for the 20 countries, including Germany, that use the euro currency.

A prolonged recession would be a disappointing outcome for an economy that, in the decade following the 2008-9 financial crisis, grew by an average of 2% a year, boasted a budget surplus for most of that period and saw its exports boom.

Inflation in Germany is running hotter than in most of its European neighbours. Consumer prices rose 6.2% in July compared with the same month in 2022, well above the 5.3% rate averaged across the euro area.

Falling private and public spending were the main drivers of the recession — defined as two consecutive quarters of declining output — that the country logged last winter.

The European Central Bank has hiked its main interest rate to a historic high of 3.75% to help curb rising prices. But a higher cost of borrowing has hit Germany’s residential building sector harder than most.

More than 40% of construction companies responding to a survey by the ifo Institute last month reported a lack of orders, up from 10.8% a year earlier, which provided further uncertainty about the country’s economic situation.

The wider industrial sector, which includes famed manufacturers such as Volkswagen and Siemens, has also taken a knock. Industrial output contracted 1.7% year-over-year in June, the latest official estimates show.

German business activity, spanning both services and manufacturing, dropped in August at the fastest pace since May 2020.

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