Thoughts

February 04, 2023 | 22:14

ECB and BoE: The Same, but Very Different

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

This week, the BoE and the ECB raised rates 50 bps. The BoE hinted that it was almost done, while the ECB sounds as if it is just getting warmed up.

The Bank of England’s hike to 4.0% was construed as dovish thanks primarily to the line: “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required”. That @if statement is far less committal than in December, when the Bank stated that persistent inflationary pressure “justifies a further forceful monetary policy response”. But, oddly, Governor Bailey played up the uncertainty of the outlook to various media outlets yesterday, repeating the view that inflation risks are more skewed to the upside than any time in the MPC’s history. So, some mixed comments but more dovish leaning.

The ECB followed with its own 50 bp rate hike, but also expressed its intention of another 50 bp hike in March. This was truly hawkish as President Lagarde repeated on several occasions during the press conference that “We have ground to cover. We know we are not done”. Plus, in all of their scenarios, “significant rate increases will be needed”. A couple of hawkish Governing Council members on Friday morning —Estonia’s Madis Muller and Lithuania’s Gediminas Simku—both voiced their preference for 50 bps in March, with the former warning not to assume an economic slowdown would lower inflation, and the latter arguing that only something “very big” would prevent a March hike, and that it may not be the last move. It all comes down to inflation, and the record 5.2% core CPI pace is bothersome.

Unhelpfully, the Euro Area’s flash estimate for CPI excluded Germany, since the region’s largest economy was experiencing technical difficulties and delayed its release. But the German figures will be out on February 9, and they will be incorporated into the Euro Area’s final CPI on February 23. Stay tuned. Despite the varying degrees of dovishness and hawkishness, we look for one more rate hike by each central bank. For now.

Thoughts from Stephen Gallo: It’s one month into 2023 and the reduced risk of an economic hard landing in Europe is providing better support to the EUR and the GBP. However, for sustained appreciation vs the USD, we think these currencies need a very sold risk appetite picture, and continued improvement in inflation. Progress in the Ukraine war, limited disappointment in energy prices, and smooth global trade (‘Goldilocks’) may also be prerequisites for substantial progress above 1.10 in EURUSD and 1.25 in GBPUSD.