Week in Review
In the euro area , the ECB held its annual central banker convention, the ECB Watchers’
Conference, so there were many updates for our central bank tracker. There were also
several surveys, including the ZEW and PMIs. ZEW weakened, but the PMIs seemed to
strengthen, though there is increased uncertainty surrounding about their interpretation.
In the UK , while the BoE left the door open to further rate hikes should sticky inflation
warrant it, we’re assuming it won’t walk through it. Rather, we see rates topping out at
their current 4.25% with policy easing around mid-2024. This week’s inflation and retail
sales data suggest upside risks, while the PMIs and CBI support our view.
In the euro area , the focus will be on core HICP data, which we expect to be strong at
6.0%. However, there are plenty of surveys beforehand.
In the UK , there are relatively few data that we expect to have a notable effect on
monetary policy. Lending data from the Bank of England will be a useful gauge for housing
market activity and credit conditions more generally.
European Economic Outlook
We see mild recessions in the UK and euro area lasting until H2 2023, but they are likely
to be shallower than first envisaged. Despite a clear negative supply shock, central banks
have been keen to lean against inflation. With official rates already up significantly, plans
for future tightening are more nuanced. Both the BoE and ECB are becoming more data
dependent, the ECB after its pre-committed 50bp hike was delivered in March. From here
we see the ECB hiking by another 2x50bp plus a final 25bp by July, and the BoE on hold
after its 25bp hike in March. We thus see peak rates at 4.25% for both the ECB (downside
risks) and BoE (upside risks). We assume rate cuts from both central banks coming a little
over a year after the last hike (settling at 2.75% for the ECB and 3.50% for the BoE).