“Global central banks are assessing the extent of the stagflationary shock. They want to keep market and consumer inflation expectations in check, while also retaining the flexibility to respond to any shock to growth and consumption. This is what we call disciplined optionality.”
- The energy shock is large enough to change the policy backdrop, but it is not yet clear enough to justify an immediate response in the form of a rate cut or a hike.
- Although oil and gas prices remain close to the ECB’s March baseline, they are still above pre-war levels.
- Thus, central banks including the ECB, will need to proceed cautiously with monetary policy in the current uncertain environment.
Major central banks (the Fed, ECB and BoE) kept interest rates unchanged in April, in line with our expectations. We believe central banks are buying time and assessing the impact of this supply shock from the war in the Middle East on broader inflation across the economy, corporate margins, wages and consumption. At the Fed, the fact that three governors opposed maintaining an ‘easing bias’ in the policy statement is evidence of how inflation concerns are becoming increasingly important at the central bank. However, we think the Fed is in observing mode and, looking ahead, would remain tilted towards a relatively dovish stance. The previous fairly balanced comments from Kevin Warsh, who will most likely be appointed as the next Fed Chair, also suggest that. But assessing the conflict’s impact on inflation calls for greater patience in the near term. We expect the next move to be a rate cut in early 2027. Even for the ECB and the BoE, we continue to advocate greater patience and believe they would stay on hold this year.
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