After the Fed, the BoE and the ECB, the two main European central banks, which held their monetary policy meeting last week, have also made a sharp shift towards a more restrictive monetary policy. A similar reaction: a hasty turnaround after a year of inaction, leading to a much stronger tightening than initially expected.
On the side of the Bank of England (BoE), if a new rate hike already seemed to have taken place before last week's meeting, it should be noted that 4 out of 9 members wanted a more marked acceleration with an increase of +50 bps (instead of the +25 bps applied) in order to fight more against the rise in inflation. The BoE is now expecting an inflation peak of more than 7% in April (compared to 6% in the latest forecasts and 5.4% achieved over one year in December) driven by energy prices (+54% from April according to Ofgem, the British energy regulator) and the shortage of labor due to Brexit.
For the ECB, however, the change in tone is more radical. As at the last Fed meeting, while the monetary policy decisions (which remained unchanged) and the press release (almost identical to that of December) did not have an immediate impact on the markets, Christine Lagarde's speech on the other hand turned out to be much more hawkish than expected. For the President of the European institution, the inflation projections in the coming months are very uncertain and, in any case it should remain high for longer than initially anticipated with risks on the upside particularly on the short term. But what has particularly caused the markets to shift is Christine Lagarde's refusal to reaffirm the ECB's desire not to increase its rates in 2022 which was until now considered very unlikely. If the recalibration of asset purchases announced in December was not decided just two months later, it is not sure, however, that it can withstand the March meeting with the risk of an accelerated shutdown of the APP. The market now anticipates a 40 bps rate hike for this year against only 10 bps at the end of last year, which nevertheless seems exaggerated.
Like the Fed, the ECB is therefore becoming “data-dependent” and will adjust its policy according to inflation data. We are therefore entering a period where "bad news is good news" and vice versa... Thus, each macroeconomic data militating for a maintenance of the inflationary dynamic will directly impact the monetary policy trajectory of the central banks and the rate level anticipated by the markets. The salvo of macroeconomic data published last week across the Atlantic has thus provided ingredients for the proponents of an accelerated rate hike. The activity indicators thus confirmed the good health of the American economy with, moreover, an ISM of prices paid which came out well above expectations (76.1 against 67 expected). In addition, employment data confirmed the trend of recent months with a tight market and a continuous increase in hourly wages. The publication of inflation figures for January, scheduled for Thursday will therefore be one to watch very closely.
