Central bank special
The ECB stuck to a 2% deposit rate and said it is well positioned to navigate through a significantly more uncertain outlook. “Well positioned” isn’t the same as “the good place” the ECB was in prior to the Iran war (and which suggested a long pause), Lagarde said. The energy shock resulted in a higher inflation forecast for 2026 to 2.6% from 1.9%. Expectations for both 2027 and 2028 were also higher than in December. The projection cut-off was March 11, later than usual. Growth meanwhile saw downward adjustments, particularly this year, to 0.9%-1.3%-1.4%. Risks are tilted to the upside for inflation, to which the ECB is more attentive to since the 2022 energy crisis, and to the downside for growth. President Lagarde couldn’t offer a timeline for any action but instead listed a whole range of indicators the central bank is watching and said the ECB is using two scenario’s next to the baseline. In the adverse one, energy prices surge but fall back. It may be the one where we are at already since oil prices surged another 20% since the projection cutoff date. The severe one is dependent on the intensity, duration and propagation of the war and see energy prices settling at higher levels for longer. The adverse one assumes no rate hikes and oil prices of $119/b, which is not far from where we are today. Inflation in such case would shot up to 3.5%. Euro area rates are up 9 bps at the front end. They were higher on the day but lost some ground in line with oil prices easing intraday as well (rather than on the ECB). EUR/USD is up at 1.1515.
Each of the four Bank of England policymakers which called for a rate cut in February backed down today. The vote to hold rates steady at 3.75% was unanimous and came with strong language that the BoE stands ready to act to ensure that inflation remains on track to the 2% target. As governor Bailey later put it unambiguously: “Whatever happens, our job is to make sure inflation gets back to its 2% target.” The energy price shock will push up inflation in the near term, creating risks for inflationary pressures through second-round effects in wage and price-setting by economic agents still-scarred by the post-pandemic inflation surge. Preliminary staff estimates put CPI between 3 and 3.5% over the next couple of quarters. Back in February, inflation was expected to fall back to around the 2% target from April. The MPC also considered the implications for inflation from the weakening in activity that was to result from higher energy costs. It offered a range of scenario’s: one where a larger or more protracted shock risked greater second-round effects and would require a more restrictive stance and one where the shock was short-lived or where more economic slack would reduce inflation pressures. A 36 bps rise in the 2-yr yield, of which some 20 bps followed the overnight escalation in the war with parties striking the massive energy facilities, reveals the market’s view. The UK money market at some point almost priced three 25 bps hikes this year. EUR/GBP holds around 0.863.
The Swedish Riksbank kept its policy rate unchanged at 1.75%. It reiterated that the rate is expected to remain at this level for some time to come, but admits that the war in the Middle East makes the forecast very uncertain. In its policy statement, it puts forward two alternative scenarios. The sequence matters. The first possible scenario is that the war has significantly greater effects on the global economy and leads to a broader and more persistent upturn in inflation. The Riksbank would then have to raise the policy rate, even though economic activity in this case would be significantly lower. Elsewhere in the statement, the central bank also warns that higher inflation is not only result from higher energy but also from the pass-on to other prices. In another scenario, negative effects on demand are so significant that they pull inflation down and push the Riksbank towards rate cuts. Swedish money market clearly move towards the rate hike scenario, given a 40% probability to a 25 bps increase in June. They take a final clue from the closing paragraph which calls for vigilance, central bank lingo for near term (tightening) action.
The Swiss National Bank held its policy rate at 0%, but showed an increased willingness to increase in the FX market given the conflict in the Middle East. The SNB thereby counters a rapid and excessive appreciation of the Swiss franc, which would jeopardise price stability in Switzerland. Simultaneously, SNB president Schlegel at the press conference said that the bar for negative rates is elevated. The SNB gives the impression to be more attentive to (unwarranted) CHF strength and its deflationary impact than to upside inflation risks from higher energy prices. New conditional forecasts suggest inflation to comfortably remain in (the lower half of) the 0-2% target. Schlegel said that the SNB can meet anytime for rate adjustments, raising flexibility in case of further deteriorating market circumstances. The Swiss franc ceded ground after the strong rhetoric at the presser. EUR/CHF returned above 0.91.
, Lagarde said. The energy shock resulted in a higher inflation forecast for 2026 to 2.6% from 1.9%.){kind=link}