PGIM: Commentary on the ECB and BoE meetings

PGIM: Commentary on the ECB and BoE meetings

12 december 2022

Centrale bank ECB
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Guillermo Felices, Global Investment Strategist at PGIM Fixed Income, shares his expectations for the ECB and BoE meetings.

This week we have three important central banks meetings, as the Fed also meets on Wednesday. These meetings come at a tricky time as rates markets have rallied sharply in recent months. US, Germany and UK 10y yields have fallen by 80bp, 60bp, 140bp, respectively since their October peaks.

At the same time, risky assets have rallied strongly, as investors are assuming that inflation is less of a threat and that central banks can downshift on the tightening paths. This has left the market vulnerable to hawkish surprises. Inflation remains high and  some components persistent in all three economies.

The fact that the ECB will they layout plans to start QT, together with the large issuance schedule in the EA and the UK next year, also leave the rates markets and assets vulnerable into these meetings.

We expect both the ECB and BoE to raise interest rates by 50bps on Thursday, in line with market expectations, and a step down from the 75bps in previous meetings.

At 10%, Euro Area inflation surprised to the downside in November, and in fact fell for the first time since June 2021. Together with softening labour market data and an impending winter recession, this should allow the ECB to slow its pace of hikes. But more so than the rate hike, the market will be watching for the principles and path the ECB lays out for Quantitative Tightening, as well as its updated macroeconomic projections.

On the other hand, UK inflation surprised to the upside in October at 11.1%. In its last press conference however, the Bank of England strongly pushed back against aggressive market pricing of its interest rate path, and made clear its bearish outlook of the UK economy. Now that calm has been restored in UK financial markets, and having already hiked by nearly 300bps in the last calendar year, the bar for a 75bps is extremely high. November’s inflation data, due on Wednesday, may point towards a larger rate hike. But we expect the BoE to stick to 50bps, and instead adopt a more hawkish tone if the data continues to surprise to the upside.

 

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