BNY’s Geoff Yu argues that recent European inflation data do not yet justify pre-emptive tightening by the European Central Bank (ECB) or Bank of England (BoE). He notes core inflation has been contained across core Europe and warns that higher rates could further damage already weak growth and consumer confidence. Markets still price some tightening, but Yu stresses policymakers have time to assess corporate pricing and wage dynamics.
"After yesterday’s CPI release, all March inflation data are now available to central bankers ahead of their policy decisions. In our view, the case for a pre-emptive move is not compelling, and on balance we do not expect the European Central Bank (ECB) or Bank of England (BoE) to move next week."
"First, there hasn’t been any surge in core inflation figures beyond expectations, and in all cases for core Europe (U.K., Eurozone, Switzerland and Scandinavia), annualized core inflation either held steady or fell. There was no sign of a demand boost, from which we can infer that either wage expectations are well anchored or any earnings growth is not translating into changes in household behavior."
"We have long held the view that the conflict started at an acutely weak point in Europe’s growth cycle. Consumer confidence surveys point to considerable near-term restraint, reflecting a generally poor economic outlook. Tightening through the interest rate channel now risks doing more harm than good."
"Based on rhetoric alone, only the ECB stands a chance of moving, but the April decision is unlikely to be unanimous. Some Governing Council members have unequivocally opposed tightening, and fears of household scarring are a recurring concern shaping near-term decisions globally."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)