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ECB Member Supports October Rate Hike Amid Global Inflation
Confirmed
In Short: Alexander DeMarco, ECB member, supports a rate hike in October due to stronger core inflation, while global inflation remains a concern.
ECB member Alexander DeMarco expressed support for a rate hike in October, citing stronger core inflation and the fragility of the economic situation. DeMarco noted that the economic situation is quite fragile and the recent rise in long-term bond yields is concerning.
DeMarco's comments come as global inflation remains a significant concern. The US 10-year Treasury yield reached 5%, its highest level since October 2023, reflecting global inflationary pressures.
In the United States, the 10-year Treasury yield rose to 5%, its highest level since October 2023, reflecting global inflationary pressures. Meanwhile, the Reserve Bank of India (RBI) faces pressure to raise interest rates as inflation has risen to 4.82%, the highest in eight months.
The MPC meeting scheduled for October 5-7 is crucial, with more economists warning that a rate hike is necessary given the robust economic growth and inflationary pressures. In light of the soaring price of sugar, the government last month allowed duty-free imports of up to 10 lakh tonnes of raw sugar until October 31.
According to Rajani Sinha, Chief Economist at CareEdge Ratings, the inflation outlook remains vulnerable to both external and weather-related risks. With inflation ticking up and the economy far more robust than expected, more and more economists have been warning that the MPC must soon increase interest rates.
The latest CPI inflation print comes three weeks before the next meeting of the MPC. Markets are expecting the US central bank to hike the federal funds rate target range by 25 basis points to 3.75–4% after inflation data released on Friday showed American consumer prices rose 0.4% month-on-month in August.
Traders will closely monitor the key US inflation data, which will be published later this week. The August PCE data seems fairly old right now, since then we have seen diesel prices in the UK and the US reach record highs, and inflation pressures escalated into September.
DeMarco’s stance adds to the debate over whether the ECB should act sooner rather than later. The US Federal Reserve unanimously voted to raise interest rates by 25 basis points to 3.75%-4.0%, marking the first hike since July 2023.
Fed Chair Kevin Warsh highlighted that “inflation is too high and has been for too long” and the central bank’s official projections showed most policymakers expect another rate increase before year end.
The MPC last increased the repo rate in February 2023. Minutes of last month’s meeting had shown that Governor Sanjay Malhotra and Deputy Governor Poonam Gupta were both hinting towards an increase in interest rates.
The economic situation is fragile, and the recent rise in long-term bond yields is concerning. Stronger core inflation could be grounds to act, and DeMarco would not exclude a rate hike in October.
The US-Iran conflict, rising crude prices, and increasing transport costs suggest that inflation may continue rising for the next few months. The US Federal Reserve’s preferred inflation gauge showed that inflation remained steady in August, with core PCE rising at a 3% annual rate, less than the 3.3% expected by economists.
What this adds
DeMarco's comments come as global inflation remains a significant concern, with the US 10-year Treasury yield reaching 5%, its highest level since October 2023.
Background
New Zealand's GDP grew by 0.2% in Q2, surpassing expectations, but the NZ Dollar remains under pressure due to geopolitical tensions and inflation risks.
The Resolution Foundation had previously warned that sustained hostilities in the Middle East could deliver an £11 billion hit to UK family finances through higher mortgage rates, utility bills, and fuel costs.
What's confirmed
- As of writing, money markets have priced in a 57% chance that the ECB will hold rates unchanged at the October 29 meeting, while the odds of a December rate hike are 84%, according to Prime Terminal.
- Alexander DeMarco, the Governor of the Central Bank of Malta and member of the Governing Council of the European Central Bank (ECB), crossed the wires on Tuesday, saying that “stronger core inflation” could be a reason for the central bank to act, saying that he supports a rate hike in October.
- Stronger core inflation could be grounds to act I would not exclude a rate hike in October Recent rise in L-T bond yields quite worrying The economic situation is quite fragile.
- An unexpected surge in government borrowing in August, driven by persistently higher inflation, has added to pressure on Chancellor John Healey as he prepares to deliver his first Budget at the end of October.
- Brazilian President Luiz Inacio Lula da Silva’s government has announced a 15 percent increase in welfare benefits ahead of a closely watched presidential election in October.
- A Datafolha poll released on Thursday found Lula winning 39 percent of the vote during the first round of voting on October 4 to Bolsonaro winning 36 percent.
- A range of indicators measuring prices rose in August, with the main gauge of household inflation rising to 4.82% from 4.45% in July – the highest in at least eight months – government data showed on Monday, bringing the focus on the October 5-7 meeting of the Reserve Bank of India’s Monetary Policy Committee (MPC), which could see the first interest rate hike in three-and-a-half years.
- In light of the soaring price of sugar – a key ingredient during the festival season for sweets – the government last month allowed duty-free imports of up to 10 lakh tonnes of raw sugar until October 31.
- “The inflation outlook remains vulnerable to both external and weather-related risks,” said Rajani Sinha, Chief Economist at CareEdge Ratings.
- According to Sinha, while the RBI is likely to remain data-dependent, a sustained uptick in inflation “could strengthen the case for a rate hike in the coming months”.
- With inflation ticking up and the economy far more robust than anyone had expected – GDP growth was a surprisingly strong 7.8% in the first quarter of 2026-27 – more and more economists have been warning that the MPC must soon increase interest rates.
- Signs of higher prices becoming “structural” was also visible in wholesale inflation numbers, according to Devendra Pant, Chief Economist at India Ratings & Research.
What's still developing
- It is undertaken after QE when an economic recovery is underway and inflation starts rising.
- The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%.
- “We expect food inflation to harden further in September-October on the back of an unfavourable base, as well as the stronger-than-usual sequential hardening in prices of some food items such as sugar, which could sour sentiment during the festive season,” Agrawal said.
- While food inflation as measured by the Consumer Price Index (CPI) rose to 5.95% in August from 5.52% in July, upward pressure in prices were clearly visible for several items, such as sugar and certain vegetables like onion.
- This makes the October meeting of the MPC “crucial to watch, especially as some major central banks have already embarked on a rate-hiking cycle”.
- Future adjustments in fixed deposit rates will largely hinge on ongoing inflation trends and RBI policies.
- However, a 4.8% inflation rate is still far below the RBI’s upper tolerance limit of 6%, a point that may trigger the RBI to increase the repo rate; rising inflation for the last many months provides a higher probability of the RBI increasing the repo rate.
- October light crude fell 4.87% to $95.42, while Brent moved above and below $100 and was near $100.05 in the supplied snapshot.
- AUD/USD is renewing two-month lows near 0.6950 in the Asian session on Wednesday, as below-expectations August Australian underlying CPI data pours cold water on expectations for further RBA interest rate hikes.
- "Yet, one of the most inflation-vulnerable countries appears set to begin a monetary easing cycle, partly pressured by elections coming up in 2028. This prospect is the true risk factor, in our view, and much more dangerous for the lira exchange rate." (This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.
- He downplays the broader systemic impact of a Turkish stock market scandal and instead highlights surging fuel-driven inflation and the prospect of CBT rate cuts.
- Ghose warns that an easing cycle in an inflation-vulnerable economy is the key risk for the Lira.