Central Banks and Inflation Blog

GBP – Inflation at 30-year high with tight employment market

This week, Bank of England Governor Bailey and three other Committee members will testify to the House of Common’s Treasury Select Committee about their February update.  They raised interest rates for the second successive meeting.  Markets are pricing in rate hikes at the March and May meetings.  The BoE policymakers are unlikely to significantly change this outlook.  The BoE’s view has been that a relatively modest rise in interest rates is likely to be sufficient to bring inflation down to target.  Inflation hit a 30-year high of 5.4% last week, with the labour market showing record unfilled job vacancies.  

The other main data for the UK is the PMIs which are likely to show a rebound with the receding numbers of Omicron cases. The services reading, with consumer-facing services, is likely to have led the rebound. We expect to the services measure back to a three-month high.  The manufacturing PMI may have fallen modestly, partly because new orders seem to be weakening. The better news is that suppliers’ delivery times have been improving suggesting that supply chain bottlenecks are beginning to ease. 

The GfK consumer confidence measure for February will provide an important gauge of the extent to which households will continue to spend. In January it fell to its lowest level in nearly a year.  With ongoing concerns about spending power being squeezed by inflation, and tax and interest rate rises this is likely to fall further in February. January public spending data will provide an indication of the fall in the public sector deficit.  Retail sales for January showed a 1.9% rise following the 4% drop in December.  

GBPEUR – 1.1986

GBPUSD – 1.3626


EUR – ECB may be moving towards rate hikes

Uncertainties about Russia’s intentions towards Ukraine continue to be at the forefront of market concerns. This is further fuelling market volatility as sentiment fluctuates between ‘risk on’ and ‘risk off’ resulting in sharp movements in bonds, equities and currencies. One result of an escalation in the crisis is a further rise in gas and oil prices, which is likely to push near-term inflation even higher. This is presenting a dilemma for central banks on how aggressively monetary policy should be tightened. Christine Lagarde spoke of the need for ‘flexibility and optionality’. She also stressed that there will be no rush to remove stimulus and tighten monetary policy. 

Some ECB officials continue to suggest that their March policy meeting will see a hawkish change to their guidance. However, any change in actual policy this year is still likely to be ‘gradual’.  The ECB policymakers appear to think that market expectations for Eurozone interest rate hikes are excessive.  Eurozone PMIs are expected to be unchanged. This is partly because new orders seem to be weakening. The input price component of the survey may provide indications of some easing in supply pressures.

EURUSD – 1.1369

EURGBP – 0.8344


USD – Further inflation rises, with Fed speakers to come

Among Federal Reserve policymakers, recent comments appear to confirm that a hike in March is a near certainty.  Further increases are also likely in 2022, though there appear to be diverging views across the committee as to how much, and how quickly, rates will be raised. The immediate question is whether we will see a 25bps or 50 bps hike in March. The majority of policymakers appear to favour the more cautious approach. 

Last week, we saw a much higher than expected January retail sales figure which points to a significant monthly rise for consumer spending as a whole. That could well push revisions for the first quarter GDP growth higher.  Durable goods orders and shipments for January will provide an update on the outlook for business investment with reports that plans are being scaled up. Finally, the Fed’s preferred inflation measure – the consumer expenditure deflator – is forecast to show another rise in annual headline inflation in January to over 6%, which would be the highest for almost 40 years.

GBPUSD – 1.3626

EURUSD – 1.1369


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*Interbank rates correct at 7 am on the date of publishing.