Following yesterday’s Central Bank meetings, James Athey, Investment Director at abrdn, shares his thoughts on the BoE and ECB decisions.
James Athey comments:
“Really interesting and impactful outcomes from both policy meetings today. Both central banks are facing similar challenges – which is to say that they have incredibly high spot inflation, increasingly unanchored inflation expectations and both have concerns about the extent to which inflation is a function of excess demand. Moreover, they both expect that without much action from themselves a lot of the current inflationary pressures will subside in time.
“The result is that both central banks have today talked the talk. Madame Lagarde sounded significantly more hawkish at the press conference than was suggested by the statement but the reality is that the policy normalisation challenges for the Governing Council are horrendous. By re-stating their commitment to cease asset purchases before contemplating the rate hikes (which are already priced by the market), the ECB is opening up a potentially huge hole for Italian bonds to fall into. The Bank of England on the other hand is already walking the walk with another rate hike and a start to their balance sheet unwind process. But longer dated breakeven inflation rates have hardly moved and the curve is flattening further. The Bank seemingly cannot win in such a scenario as the market is essentially saying that if they don’t create a recession then inflation won’t come down far enough.
“Both institutions are about to try and sail between Scylla and Charybdis and hope that they don’t fall prey to either monster or indeed be wrecked on the rocks.”
