Governor of the Bank of England Andrew Bailey addresses the media during the Monetary Policy Report press conference at the Bank of England, on 2 February 2023. AFP.
Source: Bank of Singapore, Bloomberg.
Both decisions were in line with our expectations. But the ECB clearly signalled more interest rate hikes were needed to return inflation in the Eurozone to its 2% target.
Its meeting statement warned the ECB ‘will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target. Accordingly, the Governing Council today decided to raise the three key ECB interest rates by 50bps and it expects to raise them further.’
Source: Bank of Singapore, Bloomberg.
The statement also observed another 50bps hike was likely at next month’s ECB meeting: ‘in view of the underlying inflation pressures, the Governing Council intends to raise interest rates by another 50bps at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy.’
Though Eurozone inflation has fallen from a peak of 10.6% to 8.5% now as the first chart shows, the ECB seems determined to keep raising interest rates. We now expect ECB interest rates to peak at 3.25% this year.
In contrast, we keep our view that 4.00% will be the peak for the BoE’s Bank Rate. Its 50bps increase yesterday was accompanied by very dovish guidance. The BoE stopped observing that ‘further increases in Bank Rate may be required for a sustainable return of inflation to target.’ It also noted ‘headline CPI inflation has begun to edge back and is likely to fall sharply over the rest of the year.’ Last, Governor Bailey said on inflation: ‘we have seen a turning of the corner, but it is very early days.’
The second chart shows UK inflation does appear to have peaked. We think the prospects of a prolonged UK recession combined with inflation falling sharply this year should enable the BoE to avoid further rate hikes now. The lack of any more rate rises in the UK keeps us wary on GBP
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