MarketsThe Bank of England as expected raised the policy rate by 25 bps to 4.50% in 7-2 vote. Reasons for the hike are obvious: inflation is more than fivefold the 2% target. Recent data even forced the BoE to lift the path again. Prices in 2023Q4 could still rise 5.1% vs 3.9% expected in February. Pressures should have eased to 2.3% (vs 1.4%) end next year before dropping sub 2% in the subsequent period running through 2026Q2. The BoE judges inflation risks to be significantly skewed to the upside as second-round effects may take longer to unwind. Governor Bailey during the press conference was even more outspoken: “second round effects are unlikely to go away”. Growth projections saw the largest upward revision in MPC history. The UK economy is able to escape a recession thanks to stronger global growth, lower energy prices, fiscal support and a tight labour market. The BoE also downplayed the impact on GDP from the tightening in credit conditions following the recent banking turmoil. Activity is expected to grow 0.25% this year (vs -0.5% in February) and 0.75% in 2024 and 2025 (vs -0.25% and +0.25% respectively). Unemployment would remain below 4% until the end of next year and may rise to 4.5% by 2025. All of these forecasts are based on market expectations for the policy rate to peak around 4.75% at the end of this year. The BoE indeed does not rule out further tightening, but keeps it conditional on evidence of more persistent inflationary pressures. Money markets nevertheless stick to their 4.75% terminal rate expectations. UK yields tried a comeback but are still down 9.3-12.7 bps for the day, caught in core bond yields’ slipstream. US and German yields drop in the area of 7.7-11 bps across the curve with Bunds slightly outperforming. Declines extended after second-tier US data (weekly jobless claims, PPI) hit the lower end of expectations. Additional sterling gains after a recent rally were short-lived. EUR/GBP hit an intraday low of 0.866 before reverting to a 0.87 opening level. The dollar and especially the Japanese yen are better bid as general risk sentiment deteriorated throughout European and going into US dealings. The EuroStoxx50 swapped a 0.8% gain for a 0.4% loss. WS opens mostly lower. EUR/USD falls towards 1.092. USD/JPY eases to 133.85 and EUR/JPY loses more than a big figure to 146.42.   News & Views
According to the ECB Consumer expectations survey of March published today, consumer inflation expectations increased significantly. Median expectations for inflation over the next 12 months rose from 4.6% to 5.0% and from 2.4% to 2.9% for the three years ahead. European consumers expected nominal income to increase 1.3% over the next year. Nominal spending was seen rising to 7.1% from 6.6%. Expectations on growth turned slightly more negative from -0.9% to -1.0%, translating into an expected rise in the future unemployment rate from 11.5% to 11.7%. The perceived current unemployment rate stands at 11.3%. European consumers grew slightly more optimistic on the price of their home over the coming year (2.7%) though this remains well below the levels seen mid last year. In a context of tightened access to credit, expectations for mortgage rates in the 12 months ahead edged up to 5.1%, 1.8% higher compared to expectations at the start of 2022.
CPI inflation in the Czech Republic slowed more than expected in April. Prices declined 0.2% M/M, bringing the Y/Y measure down to 12.7% Y/Y (was 0.1% M/M and 15.0% Y/Y in March). The outcome was also below the 13.2% May forecast of the Czech National Bank. The decline was for an important part due to food prices, which showed the first m/m decline since October 2021. Prices of food and non-alcoholic beverages dropped 1.6% M/M, alcoholic beverages and tobacco eased 0.9%. Transport (-0.2%), recreation and culture (-1.2%) and package holidays were lower than in March. Household equipment (+1.1%), health (1.0%) restaurants and hotels (0.8%) and goods with administered prices (0.5%) still showed higher prices. A CNB comment indicated that also core inflation eased slightly more than expected to 10.0% VS 10.2% expected, but warned that the deviation from the April forecast should not be overestimated given the volatile nature of food prices. Last week, the CNB warned that at its next meeting it will decide whether rates will remain unchanged or increase. In its assessment, CNB will keep a close eye at wages and fiscal policy. Even so, Czech money market rates, especially for tenors around the end of the year and early next year declined up to 20-25 bps. The koruna eased, albeit modestly, with EUR/CZK rebounding from 23.45 to 23.51.
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