PIMCO: ECB & BOE Preview
Ahead of the European Central Bank (ECB) and Bank of England (BOE) meetings this week, Konstantin Veit and Peder Beck-Friis, respectively, share their preview comments.
European Central Bank (ECB) Preview
By Konstantin Veit, Portfolio Manager at PIMCO
- On Thursday, we expect the ECB to keep the deposit rate at 2% for a sixth consecutive meeting.
- In our view, the new staff projections will likely show a short term inflation overshoot driven by higher energy prices, before inflation returns to 2% next year.
- We expect the ECB will stress heightened geopolitical uncertainty and signal a more hawkish tone rather than move policy immediately.
- We expect headline inflation to peak at around 3% this year, with energy contributing roughly 1 percentage point.
- We believe inflation expectations will be watched closely. While market based measures remain contained, consumer expectations appear more vulnerable.
- Should the ECB decide to tighten later this year, we do not expect hikes beyond what markets already price in.
- We believe growth projections are likely to be revised slightly lower, reflecting increased downside risks despite recent resilience.
Bank of England (BOE) Preview
By Peder Beck-Friis, Economist at PIMCO
- The BOE meets on Thursday and is widely expected to be on hold given recent events. We expect them to stay in a wait-and-see mode for the next few meetings.
- The outlook is highly uncertain and depends on the path of energy prices. If prices stay where they are, the inflation impact could be around 1 percentage point, leaving headline inflation close to 3% by year end. If prices follow forwards, however, the effect would be smaller.
- We do not expect significant second-round inflation effects from higher energy prices. This is a very different situation from 2022, when the labour market was tight and the shock followed many years of fiscal easing.
- We ultimately think the BOE will look through this inflation shock and continue cutting rates over time. But the timing has become more uncertain, and it’s possible the BOE delays cuts until late this year or even next. In any case, we see the bar for hiking rates as high.
