Thoughts

December 08, 2023 | 14:55

What Will the BoE and ECB Signal?

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

December 14 will be another one of those Super Bowl days for central bankers, namely, for the BoE and the ECB, as well as the Norges Bank and the SNB. As far as the BoE and the ECB are concerned, neither is expected to move on rates, but both have the potential to surprise on how much they turn down the dial on their hawkishness.

Let’s start with the BoE. The last two decisions to hold steady at a 15-year high of 5.25% were narrowly made, first by a vote of 5-4, then by a vote of 6-3. But the three remaining hawks are not backing down easily. Since the November 2 meeting, there was more evidence that the labour market was loosening up, inflation hit a 2-year low of 4.6%, and core CPI slowed to a 20-month low of 5.7%. Wage growth is cooling as well, but at 7.7% y/y, is still too hot for comfort and still very close to record highs of 7.9%. Among Committee members, Megan Greene stuck to her view that, although slower inflation was “good news”, she worries that doing too little was a bigger risk than doing too much. Catherine Mann believes that their policy stance has “started becoming restrictive” but “it is so only recently and not by so much”. And, Jonathan Haskel felt there were no rate cut prospects. Even Governor Andrew Bailey, who has voted with the majority, is “concerned about the potential persistence of inflation”. With £18 bln—or 0.7% of GDP—worth of fiscal stimulus coming next year (as outlined by the Autumn Statement), and the latest PMIs showing a 7-month high for manufacturing, and a 4-month high for services activity, it will be far too soon to discuss rate cuts. Expect the MPR to play down that prospect.

The ECB is expected to hold key rates steady for the second month in a row, keeping the refi rate at a 22½-year high of 4.50%, the marginal lending facility at a 15-year high of 4.75%, and the deposit rate at a record 4%. New staff projections will help fine-tune the outlook for policy in the new year. Look for a more dovish press release, dropping the line that inflation is expected to remain too high for too long. The ECB now has two new CPI reports under its belt since that meeting, both coming in below expectations, with the most recent, November, showing inflation at a 2½-year low of 2.4%, and core at a 1½-year low of 3.6%. The hawks won’t be fully convinced, though, as services CPI is still up 4% y/y, and one- and three-year inflation expectations did not turn lower in the ECB’s latest monthly survey. So, to satisfy their demands, the key line about how rates need to be “maintained for a sufficiently long duration” in order to “make a substantial contribution to a timely return of inflation to target”, or some form of it, will remain in the press release. But with France now joining Germany in contracting in Q3, and Q4 starting off weaker for the Euro Area, risking an official recession, the hawks will be careful not to be too loud with their warnings. Even one of the most ardent hawks, Isabel Schnabel, admitted that the drop in inflation was “quite remarkable” and it made another rate hike “rather unlikely”. But other measures, such as ending bond buys and bank reserve requirements, will be shelved until early 2024.