Towards a Busy Summer

• The Bank of England is under fierce criticism, but a lot is beyond its control.
• We now see the peak in the Fed tightening in July, while the “natural slope” now is probably that the ECB hikes one last time in September.

After the Fed and the ECB, focus is now turning to the Bank of England, which is widely expected to hike by another 25bps on Thursday. The British central bank is facing much criticism. It has appeared as more reluctant to tighten monetary conditions than its American and European counterparts, going as far as to warn the market against pricing too many rate hikes last November, only to be now compelled to possibly deliver even more than what had been expected at the time, amid stubborn wage pressure. We think the BoE is however having to deal with the product of political decisions and structural forces on which it has little control. In the bizarre configuration the UK is finding itself in – an overheating labour market which fails to create jobs – the shortcomings of the British healthcare system (nearly half a million people have left the workforce because of long-term sickness since 2019) and the limitations of the post-Brexit immigration system contribute a lot more than any traditional excess demand.

We review the Fed’s decision last week: we feel the FOMC may have dangled the possibility to hike twice more to avoid a market-led softening in financial conditions which could have followed the pause. We have moved our baseline to one more hike in July, but we still think this will bring enough restriction as we expect the data to tell us within the next two months that the economy is indeed landing. For her part, Christine Lagarde absolutely refused to be dragged into a conversation about the post-July trajectory. This probably reflects the absence of consensus at the Council, which makes sense given the difficulty to form a precise diagnosis at the moment. One last hike in September is probably the “natural slope” now though, even if we think we need to take the latest hawkish forecasts with a pinch of salt. The ECB is focused on the labour market, and there may not be enough evidence it is about to land by the time the Council meets in September. This however makes us even more concerned that the ECB will end up “doing too much”.