European Central Bank policymakers on Thursday lowered their annual growth forecast, as they confirmed a widely expected hold of interest rates.

Staff projections now see economic growth of 0.6% in 2024, from a prior forecast of 0.8%. Their inflation forecast for the year was brought to 2.3% from 2.7%.

As the ECB has held rates at a record high since its September meeting, market participants have been eagerly awaiting the March projections for an indication on when it may begin cuts.

Its key rate is currently 4%, up from -0.5% in June 2022, following a run of 10 hikes.

Expectations have shifted to the June meeting, even as ECB staff stress they want to assess wage data from the spring before making a decision.

Euro zone inflation eased to 2.6% in February from 2.8% in January, showing continued progress towards the ECB’s 2% target. However, the core figure which strips out energy, food, alcohol and tobacco proved stickier, at 3.1%.

This is a breaking news story. Please check back for updates.

Egypt’s pound hit a record low against the dollar on Wednesday after its central bank hiked interest rates by 600 points and devalued the currency.

The steps were meant to facilitate an agreement with the International Monetary Fund, which is expected to confirm the extension of its current $3 billion financial support package for Egypt.

The Egyptian pound was trading at roughly 50 to the dollar following the announcement, from 30.85 previously, according to LSEG data. The country’s key interest rate now stands at 27.25%, the central bank said Wednesday.

The development “shows that policymakers are committed to the turn back toward economic orthodoxy. This is likely to pave the way for an IMF deal within hours,” James Swanston, a Middle East and North Africa economist at London-based Capital Economics, wrote in a research note.

“This appears to be a positive step for Egypt on the path out of its current crisis,” he wrote.

This is a breaking news story, and it is being updated.

LONDON — The Bank of England held interest rates steady at 5.25% on Thursday, with the announcement detailing the very divided opinions among board members.

The Monetary Policy Committee voted 6-3 in favor of holding rates, with two dissenters favoring a further 25 basis point hike and one voting for a quarter-point cut. This marked the first meeting since August 2008 that MPC members have voted to move interest rates in opposite directions at the same meeting.

“The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably,” the Bank said in statement.

“It will therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation. On that basis, the Committee will keep under review for how long Bank Rate should be maintained at its current level.”

Much of the market focus of late has been on when the central bank will start cutting interest rates from their current 15-year high.

U.K. headline inflation unexpectedly nudged upward to an annual 4% in December on the back of a rise in alcohol and tobacco prices, while the closely watched core CPI figure was unchanged at 5.1%.

However, it has remained on a general downward trajectory, while the Bank’s key indicators of the labor market, wage growth and services inflation have all shown signs of easing.

The MPC notably dropped its prior warning that “further tightening” would be necessary if indications emerged of more persistent inflationary pressures, but stopped short of openly signaling that rate cuts were coming into view.

Inflation is projected to fall temporarily to the Bank’s 2% target in the second quarter of this year before rising again in the third and fourth, due to the varying contribution of energy prices to annual comparisons.

Headline inflation is not expected to return to target again until late 2026, the Bank’s newest Monetary Policy Report projected.

This is a breaking news story, please check back later for more.

The global economy does not need a “collapse” in order to bring inflation back to target and return to sustainable growth, according to Steven Wieting, chief investment strategist and chief economist at Citi Global Wealth.

Major economies have proven surprisingly resilient to sharp interest rate increases from central banks over the last two years. This has been particularly evident in the U.S., with recession thus far avoided and the labor market remaining robust.

Talk has now turned to rate cuts as inflation remains on a downward trajectory toward central banks’ targets, while growth has slowed.

Wieting told CNBC’s “Squawk Box Europe” on Monday that he is optimistic the global economy does not need an “economic collapse” to rein in inflation.

“We had one massive shock — one pandemic, one collapse. We didn’t need two recessions to ultimately cure our inflation problem,” he said.

“It’s holding down parts of our economy now — manufacturing and trade declines are happening around the world — but these are likely to bottom within the year.”

U.S. headline inflation came in at an annual 3.4% year-on-year in December, remaining above the Federal Reserve’s 2% target but down considerably from a peak of 9.1% in June 2022.

Investors will be closely watching Friday’s personal consumption expenditure (PCE) inflation figure, the Fed’s preferred metric, for further clues as to when the central bank will begin cutting rates.

Meanwhile, a preliminary estimate of fourth-quarter GDP is scheduled for Thursday, with the economy expected to have grown by 1.7%, its lowest rate since the 0.6% decline in the second quarter of 2022.

“This period of slower global growth and slowing employment growth in the United States we think can pass and lead to a healthier growth period if we take a look particularly at the next year and beyond, and that’s this year’s business for investors,” Wieting said.

He highlighted that while there is excess that needs to be worked out of the economy, this was not the result of a “true overheating” or prolonged “boom,” but instead of excess government fiscal stimulus related to the pandemic recovery that wasn’t going to be repeated.

“If you take a look at money supply in the United States, it declined 4% over the past year. Take a look at the 1970s, it was almost 10% growth for the entire decade, important prices surging 14% every single year — that’s … sustained inflation,” Wieting said.

“This story with just all of this government spending coming and going — upheaval in supply and demand, consumer spending going up or down 30% between goods and services, during the pandemic period — that’s not the environment we’re in any longer.”

The immediate ban on nearly all Palestinian workers to enter Israel following the Hamas-led terror attack of Oct. 7 has dealt a shock to the Israeli economy, the country’s central bank chief said at the World Economic Forum in Davos.

“We’re working in a very uncertain environment, as you can tell, and I would say there are two types of shocks: there is a supply shock,” Bank of Israel governor Amir Yaron told CNBC’s Dan Murphy. “And it’s primarily in the construction industry where … a third of that industry is Palestinians from the West Bank, and now they’re not coming in to work.”

“It’s also affecting agriculture, where they are in, and there are other foreign workers,” Yaron said. “So that will take a little bit, that’s a negative supply shock, and it could affect prices going up towards the second half of the year.”

He said that the bank must monitor these price developments, adding, “On the other hand, we’ve seen negative demand shock, obviously in a war. And so far that negative demand shock has been the most dominant one. And we will have to monitor that as well, as we go forward with how we are thinking about continuing with monetary policy.”

Before Oct. 7, more than 150,000 Palestinian workers from the occupied West Bank entered Israel daily for work in a range of sectors, predominantly in construction and agriculture.

The ban on most of these workers returning to their employment in Israel has dramatically hurt the economy of the West Bank. It has also contributed to anger and rising unrest over Israel’s decades-long occupation and its relentless bombardment of the Gaza Strip, which Palestinian health authorities say has killed more than 24,000 people. The Israeli offensive began after Hamas militants from Gaza launched a surprise attack on southern Israel that killed some 1,200 people and took another 240 hostage, of which 136 people remain in captivity.

In late December, Israel’s finance ministry warned that the ban on Palestinian workers could cost Israel’s economy billions of shekels per month.

“We calculated what the economic damage would be if Palestinians do not go to work…and it is estimated at approximately NIS 3 billion ($830 million) per month,” a representative of the finance ministry told Israel’s parliament, the Knesset, at the time, according to local media.

Business and factory owners in December pressured lawmakers to allow between 8,000 and 10,000 Palestinian workers to return to their jobs in Israeli settlements and businesses in the West Bank.

In comments reported by the Times of Israel, Raul Sargo, president of the Israel Builders Association, had told the Knesset: “We are in very dire straits … The industry is at a complete standstill and is only 30% productive. Fifty percent of the sites are closed and there is an impact on Israel’s economy and the housing market.”

Israel’s agriculture sector is also heavily dependent on foreign labor, in particular workers from Thailand — at least 10,000 of whom have left the country after the October attack, during which many Thai farm workers were killed and taken hostage.

Asked about what tools the bank has at its disposal to respond to a potential expansion of the war to Israel’s northern border with Lebanon, Yaron stressed the focus on preventing financial instability.

“We all hope it doesn’t happen. In case it does, then your mindset becomes financial stability,” the banker said. “That means the whole view on interest rate process … expansionary monetary policy probably stops, and you use the types of tools we’ve used so far, like the FX or things like that, and we hope we don’t need to go there.”

Yaron added that he was optimistic about his country’s ability to deal with shocks, given its familiarity with wars over the decades.

“I think we still have to remember, Israel is a dynamic economy,” he said. “It’s resilient, it has shown it can bounce back … pretty much over every military event, it has shown that it can come back and grow fast. I would say, actually, Homeland Security, economics has demand for that has grown. And hopefully, if there is a day after in which there’s a better environment with moderate states, those will bring in also new opportunities.”

LONDON — U.K. inflation fell by more than expected in to hit 3.9% in November, in the lowest annual reading since September 2021.

Economists polled by Reuters had expected a modest decline in the headline consumer price index to 4.4%, after the 4.6% annual reading of October surprised to the downside by dropping to a two-year low.

Month-on-month, headline CPI fell by 0.2%, compared to a consensus forecast of a 0.1% increase.

Core CPI — which excludes volatile food, energy, alcohol and tobacco prices — came in at an annual 5.1%, well below a 5.6% forecast.

The surprisingly large falls prompted a spike in bets that the Bank of England will cut interest rates in 2024, which manifested in a sharp fall in British bond yields.

The U.K. 10-year gilt yield sunk to an eight-month low, dropping 11 basis points to around 3.54%. Yields move inversely to prices. Meanwhile, the U.K.’s FTSE 100 was the only major European stock index in positive territory on Wednesday, climbing 0.8% by mid-morning trade.

The Office for National Statistics said the largest downward contributions came from transport, recreation and culture, and food and non-alcoholic beverages.

The Bank of England last week maintained a hawkish tone as it kept its main interest rate unchanged at 5.25%. The Monetary Policy Committee reiterated that policy is “likely to need to be restrictive for an extended period of time.”

The central bank ended a run of 14 straight interest rate hikes in September, as policymakers looked to wrestle inflation back down towards the Bank’s 2% target from a 41-year high of 11.1% in October 2022.

U.K. Finance Minister Jeremy Hunt cheered the Wednesday figures and said the country was “starting to remove inflationary pressures from the economy.”

“Alongside the business tax cuts announced in the Autumn Statement this means we are back on the path to healthy, sustainable growth,” he said in a statement.

“But many families are still struggling with high prices so we will continue to prioritise measures that help with cost of living pressures.”

Significant fall ‘undermines’ Bank of England caution

The Bank of England has repeatedly pushed back against market expectations for significant cuts to interest rates in 2024, noting last week that “key indicators of U.K. inflation persistence remain elevated.”

Suren Thiru, economics director at ICAEW, said the “startling” fall in inflation recorded on Wesdnesday will reassure households that there is a “light at the end of the tunnel,” with easing core CPI figures showing that underlying price pressures are relenting.

“The likely squeeze on wages from rising unemployment and a stagnating economy should help to continue to keep them on a downward trajectory,” he said by email.

“These inflation numbers suggest that the Bank of England is too pessimistic in its rhetoric over when interest rates could start falling. A deteriorating economy could push the Bank to start loosening policy by the Autumn, particularly if inflationary pressures continuing easing.”

A ‘glimmer of relief’

Richard Carter, head of fixed interest research at Quilter Cheviot, said the latest inflation print adds to a sense of “cautious optimism” in the U.K. relative to the cost of living crisis and bond market chaos of last year.

Despite the drop in CPI, he noted that the broader economic picture remains “complex, marred by stagnation and subdued growth prospects.”

The U.K. economy contracted by 0.3% month-on-month in October, after flatlining in the third quarter.

“This stagnation, leaving the output no higher than it was in January, paints a picture of an economy struggling to rebound from a series of unprecedented challenges,” Carter said over email, while acknowledging that the pace at which inflation is slowing offers a “glimmer of relief” for households.

“The pressures are manifold – from the cost of living crisis, volatile energy markets, Brexit aftershocks, to enduring productivity issues. These factors have collectively dampened economic prospects and consumer confidence.”

FRANKFURT — The European Central Bank meets this week with investors closely monitoring to see when the Frankfurt institution might start to cut interest rates.

It will be too early to declare victory in the battle against inflation, but with inflation at a two-year low, it certainly gives the ECB’s Governing Council breathing space to focus on another important issue: its gigantic balance sheet.

“Having reached its policy rate plateau at a 4% deposit rate, the ECB can now shrink its balance sheet at a faster pace without risking too much of a blowout in yield spreads within the euro zone,” said Holger Schmieding of Berenberg in a research note to clients.

“Nonetheless, markets will probably have to correct some of their overoptimistic rate cut expectations once the ECB has spoken this Thursday.”

Inflation declined to 2.4% in November and core inflation also has gone down. With inflation falling faster than expected, investors have increased their bets for ECB rate cuts next year, especially after one of the more hawkish members of the board, Isabel Schnabel, called the consume price slowdown “remarkable” and “a pleasant surprise,” according to a transcript of a Dec. 1 interview with Reuters.

Money markets are currently pricing in almost 150 basis points of rate cuts next year. The bank’s key deposit rate is at a record high of 4%, after 10 consecutive hikes that began in July 2022 and pushed rates back into positive territory for the first time since 2011.

“The risk is now earlier and larger cuts, and an ECB more capable of decoupling from the Fed,” said Mark Wall, an ECB watcher with Deutsche Bank.

But he believes the ECB will most likely keep its cards close to its chest: “We expect the ECB to keep the guidance that maintaining restrictive rates for sufficiently long will bring inflation back to target in a timely manner.”

Looking ahead, there will be a new round of staff projections for inflation and economic growth in March, which will give the central bank more data to back their data-dependent policy approach and possibly give it room for rate cuts.

But this week, the main policy change at the conclusion of the ECB’s meeting on Thursday might come in the form of a shift in forward guidance — specifically when it will end reinvestments of its PEPP program.

The PEPP, or the Pandemic Emergency Purchase Program, is a flexible bond purchase program introduced during the coronavirus pandemic. The ECB reinvests any maturing securities it gets from its PEPP portfolio but that could soon change. 

“We have indicated that we would continue reinvesting until at least 2024,” ECB President Christine Lagarde told European Parliament lawmakers on Nov. 27.

“This is a matter which will come probably for discussion and consideration within the Governing Council in the not-too-distant future, and we will reexamine possibly this proposal.”

Deutsche Bank’s Wall explained that “if rate cuts are moving forward, the ECB might accelerate the preliminary steps in the exit from PEPP reinvestments.”

 

 

 

European Central Bank President Christine Lagarde on Friday said that Europe is now at a critical juncture, with deglobalization, demographics and decarbonization looming on the horizon.

“There are increasing signs that the global economy is fragmenting into competing blocs,” she said at the European Banking Congress, according to a transcript.

Focusing on Europe, she said that a continuous decline in the population of working age looks set to start as early as 2025, alongside climate disasters that are increasing every year.

Her answer to these shocks was that massive investment would be needed in a short space of time, requiring what she called a “generational effort.”

“As new trade barriers appear, we will need to reassess supply chains and invest in new ones that are safer, more efficient and closer to home,” Lagarde said at the keynote speech.

“As our societies age, we will need to deploy new technologies so that we can produce greater output with fewer workers. Digitalization will help. And as our climate warms, we will need to advance the green transition without any further delays.”

She said estimates show the bloc’s planned green transition will require an additional investment of 620 billion euros ($672 billion) every year until the end of the decade, with another 125 billion euros per year for a digital transition.

“Governments have the highest debt levels since the Second World War, and European recovery funding will end in 2026. Banks will have a central role to play, but we cannot expect them to take on so much risk on their balance sheets,” she added, highlighting the proposed capital markets union (CMU).

Talks are still ongoing over a possible CMU for Europe. The aim is to create a single market for capital, making it closer to what’s available in the U.S.

The EU says that the official target is to get “money – investments and savings – flowing across the EU so that it can benefit consumers, investors and companies, regardless of where they are located.”

This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

A fierce winning streakU.S. stocks rose Tuesday to hit fresh winning streaks, their longest in three years. But Asia-Pacific markets were mixed Wednesday. Japan’s Nikkei 225 ticked down 0.1% despite rising confidence among large Japanese manufacturers, according to a Reuters Tankan survey. Meanwhile, Australia’s S&P/ASX 200 climbed 0.2% a day after the country’s central bank raised rates by 25 basis points.

Microsoft closes at a highMicrosoft shares climbed 1.12% to hit $360.53, a record high. It’s the eighth consecutive day in which the technology giant’s shares rose, a streak unseen since January 2021. Investors cheered Microsoft CEO Satya Nadella’s surprise appearance at OpenAI’s event, where he encouraged developers to build with Microsoft’s Azure cloud infrastructure.

‘Absolutely booming’ Chinese sectorChina’s economy hasn’t recovered from its pandemic blues. But in the sectors of “electric vehicles and everything around sustainability and renewable power technology,” China is “absolutely booming,” Standard Chartered CEO Bill Winters told CNBC. Relatedly, China’s truck industry is increasingly using vehicles with assisted-driving technology, a critical step toward monetizing the nascent business.

Peak, not pause?The U.S. Federal Reserve, European Central Bank and the Bank of England all paused interest rate hikes in recent weeks. This breather comes after dramatic hikes over the last 18 months as central banks grappled with unruly inflation. Some market watchers, in fact, think this lull in hikes isn’t so much a pause but the peak in rates — and are turning their attention to when central banks will start cutting.

[PRO] Buy BYDOver the past 18 months, Warren Buffett’s Berkshire Hathaway has sold more than half its stake in Chinese electric vehicle maker BYD, according to stock filings. Despite that, analysts still think BYD’s a stock worth buying — and some even raised their price targets for the firm.

Last month’s sudden surge in Treasury yields and oil prices — both of which tend to suppress investors’ appetite for stocks — looks to be ending. No, scratch that — the increases aren’t just ending, they’re ebbing.  

Look at oil: Contracts for both West Texas Intermediate and Brent futures fell around $3. WTI’s now at $77.01 a barrel while Brent’s $81.44, their lowest since July. That’s almost $10 per barrel less compared with a month ago, when prices jumped on fears triggered by the Israel-Hamas conflict.

Meanwhile, the 10-year Treasury yield fell around 10 basis points to 4.569% and the 2-year yield slipped 3 basis points to 4.915%. As Treasury yields serve as the benchmark for interest rates on loans and cash investments, sinking yields generally benefit rate-sensitive companies more. In other words: the Magnificent Seven Big Tech. Amazon led the pack, shooting up 2.13% yesterday.

That explains why the Nasdaq Composite jumped 0.9%, more than the S&P 500’s 0.28% gain and the Dow Jones Industrial Average’s 0.17% increase. Still, that’s not downplaying the movements. The S&P and Dow are enjoying their seventh consecutive session of gains, while the Nasdaq’s basking in its eighth.

If the U.S. Federal Reserve does indeed steer the economy to a soft landing, in which inflation is contained below 2% without the economy contracting, then there could be a further rally in stocks, said HSBC. Within periods of soft landings, the S&P has jumped, on average, 22% in the space between a pause and six months after rate cuts begin, noted HSBC’s global equity strategist Alastair Pinder.

And that immaculate disinflation isn’t just a dream. Chicago Federal Reserve President Austan Goolsbee told CNBC, “Because of some of the strangeness of this moment, there is the possibility of the golden path … that we got inflation down without a recession.”

Both the economy and markets have truly acted in strange, unprecedented ways ever since the pandemic. From one of the worst years for stocks and bonds in 2022, to a widely heralded bull rally in the S&P — and then a correction — in 2023. And I haven’t even started on the U.S. labor market and inflation numbers. Strange may be new and unsettling, but it isn’t necessarily bad.

LONDON — The Bank of England is widely expected to keep interest rates unchanged on Thursday, as data continues to show moderating price pressures and weakening economic activity.

As of Thursday morning in London, the market was pricing around an 89% probability of a second consecutive hold, after the Bank ended a run of 14 straight hikes in September with a surprise 5-4 vote among members of the Monetary Policy Committee.

U.K. inflation came in at 6.7% in September, unchanged from the previous month and considerably higher than in other G7 economies. Britain’s inflation remains on a general downward trajectory.

Meanwhile, recent PMI data points to a soft economic growth outlook, while the labor market, a key indicator for the MPC, has shown signs of loosening.

The S&P Global/CIPS flash PMI (purchasing managers’ index) reading for October reflected that business activity decreased for the third straight month in October and posted its largest monthly decline since January, recording lower output in both the manufacturing and services sectors.

New work and backlogs of work declined, suggesting a lack of pressure on business capacity, while private sector employment fell for the second month in a row and lower confidence in the year-ahead business outlook resulted in hiring freezes. Business optimism sank to its lowest point in 2023, the S&P Global report said.

“U.K. economic activity appears to have slowed further, the housing market is weaker, consumer spending is falling, and inflationary pressure is showing further signs of dissipating. It’s only wage growth that has surprised to the upside, but this is unlikely to persist given other indicators of labour market weakness,” said Mike Riddell, head of macro unconstrained at Allianz Global Investors, on Tuesday via email.

The firm agrees with market consensus that rates will stay on hold.

“No doubt the BoE will signal that rates can still rise if economic data indicates a need, but as voting member Swati Dhingra recently highlighted, the long lags between changes in monetary policy and their impact on the economy mean that only up to a quarter of all the BoE hikes in this cycle have made a dent on the UK economy so far,” Riddell said.

He added that the MPC will be keen to keep its options open but will for now want to wait and observe how much pain prior hikes inflict on the economy.

In a research note on Tuesday, Barclays another rate hold is all but guaranteed, given a softer-than-expected data flow compared to the MPC’s last set of projections in August, along with the surprise pause in September, when the economy was “if anything, slightly less weak than now.”

The British lender sees the U.K. central bank rate remaining at 5.25% until August 2024, before the first of an expected four 25 basis point cuts.

“We expect that the data-dependent guidance is unlikely to change, with the MPC preserving, at least in theory, the possibility of further hikes in order to prevent expectations of cuts being brought further forward,” said Barclays economist Abbas Khan.

“In terms of the vote split, we expect a 1-6-2 outcome (-25bp/hold/+25bp respectively), with external member Dhingra voting for a cut (which would be the first time a committee member has voted to lower rates in this hiking cycle), and with external members Haskel and Mann voting for a 25bp hike.”

Markets not expecting rates below 4% ‘ever again’

While the MPC’s Dhingra noted the need to assess the lagging impact of monetary tightening, fellow member Catherine Mann said that she was still concerned about persistent rises in the cost of living in the U.K. With annual CPI unchanged in the last print, there could be no guarantees that the Bank has finished hiking.

Central banks will now be wary of fresh upside risks to energy prices and supply chains, if the Israel-Hamas conflict envelopes the wider region.

Markets are not pricing any further hikes, but Allianz’s Riddell highlighted that only a few further gradual cuts are expected from August 2024 over the subsequent few years and said it was “striking that the market’s central case is for the BoE to not cut interest rates below 4% ever again.”

“The only way that we can rationalise this is if U.K. inflation remains stuck at 3% or higher forever, and/or the U.K. economy avoids a meaningful recession,” he said.

“But the spare capacity that is set to be created following the very aggressive rates hikes of the last year leads us to conclude that the hit to U.K. growth is likely to be far greater than markets are currently discounting, and inflation pressure ought to therefore quickly subside through this year and especially into next year.”

Central banks around the world are reaching a pivotal stage, as they near the end of lengthy monetary tightening cycles, following significant progress in wrestling down sky-high inflation.

The U.S. Federal Reserve will announce its latest monetary policy decision on Wednesday and is also expected to leave rates on hold in light of recent economic data and a spike in U.S. Treasury yields.

The European Central Bank last week held rates steady at their current record high of 4%, ending a run of 10 straight hikes.