Markets
The Bank of England raised the policy rate by 25 bps to 4.25% in a 7 (rate hike) – 2 (unchanged) vote. The move was widely expected among analysts though markets required a little more conviction. That came from yesterday’s unexpected reacceleration in UK inflation to 10.4% headline and 6.2% core. The BoE in February tied further tightening to the condition of evidence of more persistent inflation. It kept that conditionality in today’s statement. Despite the recent uptick, which the BoE attributed to a single volatile component, inflation is still projected to slow down considerably in Q2 this year and to a lower rate than anticipated in February. This largely reflects the extension of the government’s energy price guarantee and the fall in wholesale energy prices. Services CPI, a closely watched gauge since it is related to wage pressures, was in line with expectations although wage growth is likely to fall back somewhat more quickly than projected in February. The BoE believes it was too pessimistic on growth. GDP should grow slightly in Q2 compared to a -0.4% feared one month ago. A stagnation rather than a significant drop in real household income, thanks to a tight labour market, helps a hand. The Financial Policy Committee briefed the BoE MPC about the recent banking turmoil and judged that the UK financial system is robust. Wholesale funding cost have risen nonetheless and the BoE said it’ll closely monitor its effects on credit conditions. The central bank said it’ll make a full assessment on the economic implications at the next meeting in May, when new forecasts are due. By hiking and retaining the conditionality, the BoE thus bought some time. According to current market pricing, the BoE is set for one more 25 bps hike in either May or June. UK gilt yields drop up to 16 bps at the front. More than half of the move happened before the meeting in a reaction the repositioning in the US late yesterday. Sterling strengthened marginally against the euro (EUR/GBP 0.883).
Other markets still digest yesterday’s Fed. Short term US yields barely recover from yesterday. Long tenors add up to 7.2 bps. German yields slip up to 15 bps at the front in a catch-up move with the US. Swap yields decline about half of that. The dollar stays in the defensive though clawed back a bit intraday. EUR/USD temporarily surpassed 1.09 but is currently changing hands around 1.087”, up from 1.0856. USD DXY tested the 102 support area to trade more or less unchanged at 102.43.
News & Views
The Swiss National Bank (SNB) raised its policy rate by 50 bps to 1.5% and doesn’t rule out additional rises if necessary. The SNB remains active in FX (selling FX reserves) to provide the appropriate monetary conditions and avoid a (too) weak CHF. The SNB argues that measures, including providing CHF and foreign liquidity assistance, have put a halt to events surrounding Credit Suisse. It puts the focus back on inflation which has risen to 3.4% Y/Y in February with price increases being broad-based. New CPI forecasts (suggesting 1.5% constant policy rate) are higher than in December (which used a 1% constant rate). The new forecast puts inflation at 2.6% for 2023, and 2% for 2024 and 2025. At the end of the forecast horizon, inflation stands at 2.1%. Despite the slight recent upturn in economic activity, growth is likely to remain modest for the rest of the year (around 1% from 2.1% for 2022). In the short term, the main risks are an economic downturn abroad and adverse effects of the turmoil in the global financial sector. The Swiss franc gains today. EUR/CHF falls short of hitting parity and drops back towards 0.996.
The Norges Bank raised its policy rate by 25 bps to 3%. If developments turn out as expected, the policy rate will be raised further in May. Upwardly revised policy rate forecasts indicate a peak rate of 3.5% compared to 3-3.25% in December and >3% policy rate levels over the 2023-2025 horizon. The Norwegian economy remains more resilient than feared and the labour market tighter. Inflation came out somewhat lower (6.5% Y/Y in February) because of decreasing energy prices, but higher wage growth (4.3% in 2022 and 5.1% projected for 2023) and a significantly weaker krone are expected to push up inflation ahead. Core inflation projections remain above 2% up until 2026 (5.6%-3.8%-2.9%-2.2%). If the krone proves weaker than projected, or pressures in the economy persist, a higher policy rate than currently projected may be needed to bring inflation down to target. If inflation falls faster or unemployment rises more than projected, the policy rate may be lower than projected. The Norwegian krone profited from the hawkish message with EUR/NOK sliding from 11.35 to 11.28.
