Colin Finlayson, co-manager of Aegon Asset Management Strategic Bond portfolios, comments ahead of the ECB monetary policy decision today:
“Bond markets started this year focused on inflation and what that was going to mean for central banks. But that narrative has been turned completely on its head. We are now focusing on the escalating conflict within Ukraine and how this could change thinking at the ECB. The escalating conflict is going to have material macroeconomic implications in two mains ways.
“Firstly, inflation will remain higher for longer. The rapid increase in energy prices means already high levels of inflation will stay elevated for much longer.
“Secondly, there is going to be an impact on economic growth. Sentiment will be dented, and higher energy costs will begin to impact economic activity. Europe in particular is going to be more sensitive to that. Central banks will have to begin to think more carefully about their anticipated tightening paths. We still think the US Federal Reserve and Bank of England will continue to raise rates in the coming period.
“But in Europe, where removal of some stimulus is required, given the level of inflation, we could see a more cautious approach from the ECB now in how they go about doing that. This will be a key driver for markets in terms of sentiment and direction of policy in reaction to the economic effects of the Ukraine conflict.”