PIMCO: Commentary on yesterday's BOE and ECB announcements
Peder Beck-Friis, Economist, and Konstantin Veit, Portfolio Manager, comment on yesterday’s Bank of England (BOE) and European Central Bank (ECB) announcements, respectively.
Bank of England Reaction
By Peder Beck-Friis, Economist at PIMCO
- The BOE held rates at 3.75% in a unanimous vote, but the tone turned more hawkish. The Monetary Policy Committee (MPC) said it stands “ready to act as necessary” and highlighted risks of second-round effects from higher energy prices.
- The BOE is not ruling anything out, keeping all options open, including rate hikes.
- The MPC is likely talking hawkishly to control inflation expectations and the narrative, but it is far from clear that it wants – or will follow through with – actual hikes. Andrew Bailey even cautioned against strong conclusions about BOE rate hikes in an interview after the meeting.
- The outlook remains uncertain and will depend on the path for energy prices. If energy prices fall to the levels the market expects, we think the MPC is likely to eventually look through this shock. But further increases in energy prices would raise the risk of hikes over time.
European Central Bank Reaction: A Shift in Rhetoric
By Konstantin Veit, Portfolio Manager at PIMCO
- While the ECB left policy rates unchanged, it adopted a more hawkish rhetoric on the back of the developments in the Middle East.
- The ECB now projects inflation well above target near term, before converging back to 2% during the course of the next year.
- While President Lagarde stressed differences to 2022, she also made clear that the ECB would do whatever it takes to ensure medium term price stability.
- We believe that it is too early to have a strong view on the policy response, as intensity and duration of the disruption remain highly uncertain.
- The ECB will be sensitive to spill-overs into core inflation, and will monitor inflation expectations very closely.
- For now we expect hawkish rhetoric only, but believe the bar for the ECB to fully look through a period of above target inflation is somewhat higher than pre-2022.
- Initial conditions, a less baseline-centric reaction function and reduced reliance on macroeconomic model output could suggest a more nimble ECB.
- Should the ECB decide to act later this year, as of today we would not foresee the ECB to hike more than what is currently priced into markets.
