In anticipation of this week’s ECB and Bank of England meetings, abrdn economists share their thoughts.
Luke Bartholomew, Senior Economist, abrdn on the Bank of England:
“We are expecting the Bank of England to hike rates by 25bps this week, and start the process of passively reducing the size of its balance sheet. While Omicron is likely to have taken a dent out of economic activity in December and January, we expect this to be relatively small in the context of past lockdowns and therefore, that the economy should recover relatively quickly from here. Meanwhile, the labour market seems to have weathered the end of furlough better than even the more optimistic forecasts. As such, the Bank is free to focus on inflation, which is clearly a growing concern for all policy makers. While there is little the Bank can do about the short term inflationary pressures brought on by rising energy prices and supply chain issues, tightening monetary policy should help to keep inflation expectations anchored and prevent higher inflation becoming more deeply embedded in price setting behaviour. This means that rates are likely to increase several more times this year as the Bank signals its inflation fighting intent even in the face of a squeeze on household incomes this year.”
Pietro Baffico, European Economist, abrdn on the ECB:
“Investors should expect the ECB to confirm its course of gradual monetary policy normalization on February 3rd, and therefore to lag behind the BoE and the Fed in terms of monetary tightening. Policy changes are unlikely this week, following the hard-won decisions in December on the path of net asset purchases, with those under PEPP ending on schedule in March, while leaving the APP with no expiry date for now.
“The ECB might acknowledge a high level of uncertainty regarding the future inflation path, and the flash estimate for the Eurozone inflation rate next Wednesday will provide a new hint. Renewed uncertainties include the impact of the latest Covid-19 wave, as well as pressures from the energy markets. Investors should still consider that the ECB will retain a flexible and data-driven approach throughout this year.”