Week Ahead (31 October)

Monday, 31 October - Eurostat flash inflation estimates for October to be released

Eurostat will publish its latest flash estimate of inflation today, showing early results for the month of October. In Italy, the EU’s third largest economy, inflation is estimated to have increased to 12.8% in October from 9.4% in September and significantly ahead of market expectations of 9.9%. French inflation came in at 7.1% - also ahead of market expectations of 6.4% while Spain saw inflation slow to 7.3% - below the 8.1% projections.

The continued high rate of inflation is the key driver behind ECB’s decision yesterday to raise interest rates by a record 75 basis points rate for the second consecutive time, despite fears of a looming recession. Nevertheless, there were dovish signals from the ECB last week which saw the Governing Council drop a reference to increasing rates "over the next several meetings" that was in its September statement. 

Monday, 31 October - Eurostat electricity and natural gas prices for S1 to be released

On Monday, Eurostat will also release its data on electricity and natural gas prices in the EU for the first half of 2022.

Their release is especially anticipated in a calendar year where energy prices reached all-time highs on multiple occasions largely driven by the impact of Russia’s invasion of Ukraine, the impact of Western sanctions on certain Russian energy products, and more importantly, Russia’s weaponisation of its energy exports which continues to test EU unity as the war in Ukraine drags on.

Last month, Gazprom announced that Russian gas deliveries to the EU have dropped by 48% this year, sparking a series of debates among member states and the European Commission on different ways to tackle the socioeconomic impact of soaring energy bills for households and businesses.

Nevertheless, following an unprecedented surge during the first half of 2022, which is expected to be documented in Eurostat’s data release, prices have eased to their lowest levels in more than three months, largely thanks to the EU’s significant progress in filling its gas storage capacity, as they are currently nearing their full capacity, standing at 93.6% of their maximum capacity as of 27 October.

However, the International Energy Agency has warned that energy supplies for the winter of 2023 are far from secure, especially as China, the world’s largest LNG importer, may exit its zero-covid policy next year, which would mark a return of its gas demand to normal levels.

Tuesday, 1 November - House of Lords European affairs committee meeting to be held on EU-UK relations, including NI protocol dispute

On Tuesday, the House of Lords European affairs committee will meet to discuss the state of EU-UK relations. The following day, a meeting of the House of Lords sub-committee dedicated to Northern Ireland and the implementation of the Protocol takes place

Both meetings will take place against the backdrop of last week’s developments in Northern Ireland, where the DUP’s refusal to revive the assembly means that a snap election for a new assembly will have to be scheduled in December.

It remains to be seen whether the new Prime Minister, Rishi Sunak will push ahead with the Bill to scrap the Northern Ireland Protocol, which would escalate a confrontation with the EU. Timing does not favour a confrontation with the EU, given the ongoing cost-of-living crisis and a trade war would have significant repercussions for the British economy and would further boost the opposition Labour party.

Thursday, 3 November – Bank of England to decide on interest rates

The Monetary Policy Committee of the Bank of England (BoE) will meet on Thursday, with expectations high that it will increase interest rates for the eighth meeting in succession.

BoE’s interest rates are currently at 2.25% after the BoE raised interest rates by a 50-basis point in September, for a second consecutive month. Last Wednesday, Prime Minister Sunak warned that his government will need ‘’to take difficult decisions’’ to restore economic stability and confidence in the UK economy, following the market upheaval caused during Liz Truss’ 45-day tenure as Prime Minister. It is now widely expected that the BoE will opt for a 75-basis point increase, following earlier fears of a potential 1 percentage point rise.

Even though the worst-case scenario of a 1 percentage point hike will most likely be avoided, a 75-basis point rise in borrowing costs will be the biggest interest rate hike in more than 30 years and will put additional pressure on mortgage payers and private renters amid a worsening cost of living crisis

Inflation levels are currently five times higher than the BoE’s declared target rate of 2%. Hence, rising interest rates are expected to continue, with analysts estimating that BoE rates could peak between 4% and 4.5% in Q2 2023.