Central banks update: Fed on hold with less easing bias, ECB on track for hike in June, BoE on hold with potential insurance hike ahead

Bank of England: on hold for now, but potential for insurance hike(s) ahead

As expected, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted to hold bank rate at 3.75%. There was one dissent, with chief economist Huw Pill voting for a rate rise.

Increasing risk of hikes

There are clearly still differences in view from the MPC but, for now, these seem on a spectrum between being comfortable holding and wanting to hike rates. The minutes did not give the impression that anyone was considering a cut. Putting Pill to one side, while the rest agreed to keep rates on hold, within that group two broad views were described. One view was that modest second round effects would be offset by weaker activity. Another view “emphasised that material second round effects were plausible”. Within this second camp, there were “differing views on whether and when a tightening in monetary policy might be needed.”

Tighter financial conditions are helping

Quite a bit seems to depend on the market. The decision to keep rates on hold partly reflected that markets have done some of the work for them (“recognising that the tightening in financial conditions would help to reduce inflation over time”). There is clearly circularity there – part of the reason for tightening financial conditions has presumably reflected markets being priced for multiple rate hikes in the UK.

A focus on scenarios, but messaging unclear

There was, as suspected, a strong emphasis on scenarios. Rather than publish a central case, the bank has published three scenarios (A, B and C) that build in worse/more persistent energy price rises and more second round effects as they go from A to C.

For us that left the messaging on the most likely policy path somewhat unclear: (1) different MPC members place different weights on different scenarios; (2) numbers in the monetary policy report appear consistent with rate rises in at least Scenario B and C; (3) Governor Andrew Bailey in the press conference implied that Scenario B may not justify rate rises: 

Different members, different (scenario) views 

Andrew Bailey, Sarah Breeden and Clare Lombardelli all indicated they would place the most weight on Scenario B. Dave Ramsden said he places equal weight on Scenarios A and B, while Megan Greene said she thought that inflation may end up “somewhere between Scenarios B and C”. Swati Dhingra said she wasn’t “strongly attached to any of one of the energy price scenarios” while Catherine Mann said she expected greater second-round effects than in any of the scenarios.

Numbers in the report look consistent with somewhat tighter monetary policy (mostly)

The monetary policy report contains scenario specific forecasts for variables, including CPI. There are also different policy profiles published for those scenarios (which are based purely on a model-based approach, rather than agreed by the committee as such):

• CPI profiles imply rate hikes, at least in Scenario B and C: The CPI profiles all build in a market-implied rate profile. In this case that means building in two rate hikes this year. In scenario A, inflation peaks at 3.6% in Q4 2026, before falling below target by the end of 2027. At face value that would suggest two hikes would be too many. In scenario B, Inflation peaks at 3.7% in Q4 2026 before falling back to target at the start of 2028. At face value that would suggest two rate hikes was roughly right. In Scenario C, inflation peaks at 6.2% in Q1 2027 and remains above target the entire forecast horizon. At face value that would look consistent with more than two hikes. 
• Rates profiles imply hikes in all three scenarios: These paths for CPI (and other variables) are then applied to a set of mechanical policy rules (see Annex 1). Looking at the resulting stated ‘optimal policy projections’ these show two hikes in Scenario A and B and roughly five hikes in Scenario C.
• Governor Bailey’s comments looked consistent with hikes only in Scenario C: However, in the press conference, Governor Bailey gave the impression that Scenario B may not justify hikes by the Bank. He said, “there was 55 basis points of cuts assumed as this set of events started, the conclusion from that analysis is that there is a good deal of room to accommodate the type of tightening that would be needed in A or B within that range of 55 basis points”.

While the communications around this meeting may not have been crystal clear, we did not find a reason to move away from our expectation of a BoE rate hike this year.”

Implications for the outlook: 

While the communications around this meeting may not have been crystal clear, we did not find a reason to move away from our expectation of a BoE rate hike this year. We see a case for an ‘insurance hike’ – or rather a hike in order to reduce the risk of second round effects. For more see our blog 'Energy Shock Hits Outlook'. 

US Federal Reserve: on hold... with less of an easing bias 

As expected, the US Federal Reserve kept rates on hold (Fed funds target range of 3.5%-3.75%). The two main developments were arguably first that Jerome Powell announced he would stay on as a governor once Kevin Warsh becomes the new chair, and second that disagreements around whether the Fed still wanted to communicate an easing bias. Overall, though, there was nothing in this week’s meeting and press conference that leads us to change our central case that the Fed will likely stay on hold this year.

Powell announced that he would be staying on as a governor once he steps down as chair. This will happen in May assuming no more hold ups with Warsh’s appointment as the new Fed chair. Powell’s term as governor doesn’t run out until 2028, even while his term as chair ends in May. It is not usual for a chair to stay on though. He said he won’t leave the board until the investigation bought by the Department of Justice is “well and truly over” with “finality and transparency”:

• This is not with the intention of disrupting Warsh. He said he will not be a shadow chair and that he intends to be supportive and take a low profile as a governor. He said he was “not looking to be a high-profile dissident”. 
• Powell has effectively linked this to his worries around Fed independence. He talked directly about some of his concerns on that front again. He made clear he had no problem with criticism from politicians, but he is worried about attacks on the Fed and the potential damage to its ability to conduct policy free of political influence. He talked about the institution being “battered" and having to resort to the courts.

Less of an easing bias

There was one dissent on the rate decision with Stephen Miran preferring to cut rates by 25bps. There was further dissent over the “guidance” language in the statement. For now, the Fed has kept the language, “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data....” In other words, the Fed has retained an easing bias. However, Beth Hammack, Neel Kashkari and Lorie Logan did not want to keep this in there. Asked about it during the press conference, Powell said there was a vigorous discussion around this and that the number of people who could support a more neutral stance has increased over the inter-meeting period. While he said the majority are still on the page of not feeling the need to move to a neutral stance, that could conceivably come at the next meeting. Later, he framed that more around signalling, suggesting that the majority did not want to send a signal on that; that there was a group that don’t feel the need to be in a hurry on it.

Fed seem unlikely to cut rates any time soon

Powell maintained that policy was “in a good place” and that the Fed could move in either direction depending on how things evolve. For now, it doesn’t seem like the Fed are close to cutting rates. Powell said the Fed expect the “one time” increases in prices from the tariff shock to feed through over the next two quarters, and that the Fed would “want to see the backside [of the energy price increases] and progress on tariffs before we even thought about reducing rates”. He also talked about the economy being quite resilient and growth quite solid.

It continues to seem unlikely that a Fed rate rise (or cut) will come any time soon, and we continue to expect the Fed to keep rates on hold for the rest of this year.”

Implications for the outlook – on hold for a while

For now, we don’t think anything in today’s meeting or press conference changes our outlook for monetary policy. It continues to seem unlikely that a Fed rate rise (or cut) will come any time soon, and we continue to expect the Fed to keep rates on hold for the rest of this year. The outlook, however, as elsewhere remains sensitive to what happens in the Middle East. For more see our blog 'Energy Shock Hits Outlook'. 

European Central Bank: on track for a hike in June

As expected, the ECB kept monetary policy unchanged at its 30 April meeting. Much of its core messaging was unchanged. The bank continues to point to downside risks to the growth outlook and upside risks to the inflation outlook. It continues to take a data dependent, meeting by meeting approach.

A June rate hike for now sounds like a strong possibility.”

Communication consistent with a June hike

Clearly the outlook is highly uncertain (another point emphasised by ECB President Christine Lagarde). Lagarde said that the bank made an “informed decision on the basis of yet insufficient information”. A June rate hike for now sounds like a strong possibility (not least following post-meeting newswires suggesting that according to “ECB sources” a June hike is very likely):

• The bank is moving away from its baseline: Lagarde said that relative to the baseline, they were certainly moving away from it.
• It debated a hike: She said that they debated keeping rates on hold (ultimately that was a unanimous decision) but that they also debated a possible rate hike. She said that was debated among all governors: “It was a deeply discussed monetary policy stance at which the outcome was a unanimous decision to leave interest rates unchanged.”
• It will have more to go on in June: Lagarde said that there was such uncertainty, that they need to understand and revisit this again at their next policy meeting. She said that they believe that given the position they are in, the six weeks will be the right time to assess developments and the possible outcome of the conflict.
• Language tweaks: She was quizzed on the “closely monitor” language in the statement. She said while she tried not to be “excessively coded,” on the basis of hard data, on the basis of a worsening of risk assessment and in view of uncertainty, they are bound to revisit the situation. She said that, directionally “she thought she knew where they are heading but “we shall see”.
• Even the baseline has two hikes in it: The bank’s March forecast baseline had a return to 2% inflation after embedding two rate hikes. At one point in answer to a question, Lagarde thanked the journalist for reminding everyone that the baseline and scenarios had two hikes in them.

So why didn’t the ECB hike today? 

Lagarde gave the reasons that:

1. they start from a good position which gives them time to revisit the data
2. they are not seeing second-round effects
3. financial tightening is happening. In other words, there is no immediate rush, and they will have more to go on at the next meeting.

We continue to pencil in two hikes this year 

We continue to pencil in two hikes this year from the ECB and, for now, it seems reasonable to think that the first of those will come in June.

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