Markets
“All members nevertheless agreed that the appropriate policy response would depend primarily on the outlook for second-round effects. If higher inflation were to reflect mainly direct energy effects and second-round effects were to remain contained, there was a stronger case for tolerating a slower return of inflation to target, in the context of weak activity. However, there would be a more challenging trade-off if higher energy prices appeared to be feeding into more persistent domestic inflation. In that event, the weight placed on output stabilisation would be likely to diminish, and policy would need to remain restrictive for longer, or become more restrictive.” That sums up the discussion at the Bank of England today. The central bank voted in a 7-2 split decision to keep the rate steady at 3.75% while retaining that it stands ready to act as necessary to have inflation meet the 2% target. Risks to inflation remained skewed to the upside. Policymakers noted that despite the recent oil price decline, there remains huge uncertainty regarding the US-Iran deal and that there’s bound to be a logistical delay in restoring energy production and transportation that may keep prices elevated for a longer period. A majority, however, considered continued weakness in activity and softness in the labour market (though not per se illustrated by this morning’s labour market report) to limit the strength of any potential second-round effects. The camp of 7 said it was too early to draw conclusions on the matter and that the current, restrictive policy stance, compounded by market-based tightening would weigh against them anyway. The members (Greene, Pill) voting for a rate increase to 4% thought of it in terms of risk management given the significant uncertainty about the extent of such second-round effects. The pound initially extended losses and UK front-end yields retreated from intraday highs after the decision, potentially disappointed with the BoE not stating a stronger commitment. Moves in both were limited either way. EUR/GBP is trading around 0.866 as it now eyes the potentially more important Manchester by-election. UK money markets hold on to at least one hike by end-2026. The UK yield curve flattens with changes varying between +4 bps (2-yr) to -2 bps (30-yr) in a move that mirrors the US’ yesterday. Fed chair Warsh’s first presser left marks on the EA bond market too, where yields are changing +4 bps (2-yr) to -2.5 bps (30-yr). US front-end yields stabilize around yesterday’s highest close since February 2025. The long end continues to rally on compressing (inflation) risk premia. The likes of the 30-yr at some point dropped 7 bps. By focusing on the central bank’s inflation remit, Warsh at least temporarily is given the benefit of the doubt. That’s also supporting the US dollar, in spite of a slightly weaker oil price and improved risk sentiment. EUR/USD hits a new recent low at 1.1469. Key support is situated at 1.1392. DXY even surpassed the March high to trade at the strongest levels since May 2025.
News & Views
The Norges Bank kept its policy rate unchanged at 4.25%, but the current assessment of the outlook implies that it will likely be necessary to raise the policy rate further at one of the forthcoming meetings. Updated projections still suggest that it would be a final hike (fully discounted by the September meeting). Inflation is too high, higher than anticipated, and the rapid rise in business costs in recent years will contribute to keeping inflation elevated ahead. Underlying inflation (CPI-ATE) is expected to drift gradually towards the 2% target by the end of the policy horizon (2.1% by 2029 via 3.2%-2.8%-2.3% in 2026-2028). The central bank adds that it doesn’t want to restrict the economy more than needed with growth being slightly weaker than expected and the labour market loosening. The Norwegian krone loses some more ground today, but that June move is mainly inspired by lower oil prices. EUR/NOK trades at 11.10 compared with 11.20 at the start of the Iran war.
The Swiss National Bank sticks with its 0% policy rate. Inflation is expected to be marginally higher than in March, but still in the lower half of the 0%-2% tolerance band. Assuming an unchanged policy rate, the SNB expect average inflation of 0.6%-0.6%-0.7% for the 2026-2028 period. The Swiss economy has proved to be resilient given the conflict in the Middle East, but the SNB expects a negative effect from more moderate global growth. Still, the central bank expects growth of around 1% this year and around 1.5% next year as the accommodative monetary policy provides some help. If necessary, the SNB has an increased willingness to intervene in the FX market to counter a rapid an excessive CHF-appreciation. EUR/CHF holds above short term support at 0.92 which has been under test over the past few sessions.
