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The Macro Brief – From Frankfurt to Threadneedle Street
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The economics team takes over the studio this week, with Chris Hare, Liz Martins and Fabio Balboni discussing the latest Bank of England and ECB meetings.
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Transcript
Introduction to The Macrobrief
00:00:05
Speaker
Hello, I'm Chris Hare, Senior European Economist here at HSBC, and welcome to The Macrobrief, a podcast that looks at the issues driving financial markets.
Central Bank Decisions Overview
00:00:15
Speaker
Now, it's been a busy week of central bank decisions here in Europe, with both the Bank of England and ECB holding policy meetings.
00:00:23
Speaker
So on today's podcast, we're going to review the key takeaways assess the future path of interest rates, and explore whether recent developments at the Federal Reserve could have any spillover effects
Meet the Guests
00:00:35
Speaker
to Europe.
00:00:35
Speaker
And to do that, I'm joined in the studio by Liz Martin, senior UK economist, and Fabio Balboni, senior Eurozone economist. Liz and Fabio, welcome.
Bank of England's Rate Decision
00:00:45
Speaker
Thank you. Thank you.
00:00:46
Speaker
So there were no policy changes on either the Bank of England or ECB meetings, but that doesn't mean that we're going to have a boring podcast because there was some interesting news in the communications from both central banks. Let me start with Liz and the Bank of England. The reaction that you put together talked about the Bank of England's comms taking a dovish twist. So what did we learn?
00:01:08
Speaker
Yeah, that's right, Chris. I mean, the BOE is rarely boring um and today was no exception. So the Bank of England did keep rates on hold as expected, but we had four votes for an immediate cut out of nine members of the committee. So it was quite a tight run thing. um And then the Bank of England said, actually, we are more comfortable about inflation. We think wage growth will be consistent with our target by the end of the year. We think inflation two years from now will be below our target.
00:01:36
Speaker
And we're worried about things like the labour market as well. So all in all, this was a dovish shift compared with the the tone that they struck um just a few weeks ago back in December. So I think, you know, lots of risks, lots of uncertainty. um But broadly, it's supportive of our own view, which is for slightly more easing than certainly what was priced into the market before this meeting and um and even than what is priced in
Timing for Rate Cuts
00:02:03
Speaker
now.
00:02:03
Speaker
So a bit more easing, a bit more in the way of rate cuts from the UK, but particularly given that it was a pretty finely balanced vote, can we say with much confidence when the next cut might be and also actually where the Bank of England can ultimately get to in terms of interest rates?
00:02:18
Speaker
I think the the first question is a little bit easier than the second. So we are forecasting a cut in April. The market is now almost fully priced for that outcome, although it also has about a 60% chance that it could come sooner at the March meeting. um You only need one person to switch votes to get that outcome and both Andrew Bailey and Catherine Mann kind of from their comments could could switch their votes. So um next cut, I think, you know, in in the next couple of meetings, where we get to, I think, is a harder question. And this comes down to what the bank keeps saying.
00:02:53
Speaker
As we get closer to neutral, it gets harder to take these um decisions. So Our own view is that neutral is 3% and we will get to that point by the end of the year. But it doesn't matter what we think. What matters is what the Bank of England members think. We know that two of the members agree with us that that neutral is 3%. Others seem to think it's considerably higher. So it will get harder um and and and is hard to to judge where where we ultimately end up.
00:03:18
Speaker
Does it make a big difference? 3% rates, 3.25% interest rates? do we Does that really matter? Well, I'm sure the Bank of England would say it matters a very great deal. But realistically, I think, you know, we've been forecasting 3% for a long time. um At times, the market had been saying bank rate will never get below four and a quarter.
UK Economic Optimism and Risks
00:03:38
Speaker
So, you know, we're getting down closer and closer to what we ultimately thought would happen. um and and and yeah, as as we get closer to that, the difference gets smaller.
00:03:47
Speaker
So beyond the humdrum of ah monetary policy and the rates outlook, Andrew Bailey, Bank of England governor at the press conference, was also asked about political risks and very understandably sort of shied away from the monetary policy ah implications of those sorts of political developments. But what can we say about the potential economic implications of some of the political volatility here in the UK?
00:04:10
Speaker
Yeah, well, look, the UK, as as has become traditional, is starting to perk up a little bit at the start of the year. So we see the PMI surveys picking up a little bit, loan growth picking up, some of the housing market indicators looking a little better. So hope springs eternal. And, um you know, there's a little bit more optimism around the economy as we come into the ah um in 2026, as we say, inflation is coming down, we think interest rates are going to continue to come down, all those are good things. But it's ah it's a narrow path forward to that recovery and that better year ahead. and And one thing that could disrupt it, of course, is political instability. And that's something the UK has seen a lot ah of over recent years. And it's not helpful for that narrow path towards recovery. So like Mr Bailey, we'll be watching developments very closely.
ECB's Policy Hold and Eurozone Growth
00:04:57
Speaker
Thank you, Liz. Of course, many risks around the UK outlook, risks which were also discussed by the ECB. And let me turn now to Fabio about the policy decisions there. So no policy changes at the ECB meeting like the Bank of England.
00:05:10
Speaker
In terms of the overall balance, though, dovish or hawkish? Yes, thank you, Chris. I mean, the fact that there was no policy change was hardly a surprise. I think the ECB has been ah and keen ah to remain ah on hold ah and in the account of the December meeting, even suggested for an extended ah period of time, if possible. But yeah, the policy statement was maybe a little bit more hawkish than might have been anticipated. And particularly there were and a reaffirmation of the resilience ah of the recovery, there were an underlining of employment and being low, solid private sector balance sheet, ah resilience of the economy and indeed of more fiscal policy support coming through. So certainly the choice ah to highlight the upside risk to growth, a relatively to potential downside risk, particularly against what we've seen at the start of the year. So geopolitical risk coming through does suggest that maybe the ACB is feeling a little bit more confident about the growth s laut and as such, ah probably even fewer chances of them potentially cutting rates over the course of this year.
00:06:10
Speaker
Interesting. So a little bit more confidence in terms of the near term growth outlook as a reading of how indicators have have panned out. Would we share that view? How's the start of 2026 looking?
00:06:21
Speaker
The start of 2026, based on the survey, is looking at fairly decent. The PMIs were good. and They were weaker in France, but we know that might have been related to political uncertainty related to the budget, which eventually was approved and therefore could unwound in February. It is clear that plenty of downside risks ah remain. ah We might not still have seen the full extent of of the negative impact from tariffs. Certainly the global backdrop doesn't look like it will so be supporting Eurozone growth. ah But it is fair that certainly certain things are surprising to the downside. And as Christine Lagarde noted today, certainly investment and is one of those. ah And even though we might not be seeing in Europe the same extent and of AI related investment that we're seeing in the US, probably something is happening ah and is helping kind of lift the growth outlook. ah The other thing that I would say is that Christine Lagarde did dismiss the inflation undershooting which took place ah in ah in January. Inflation was at 1.7%, the ECB was looking for inflation at 1.9% in Q1, 2026. And that in itself is another interesting communication. ah and and Christine Lagarde said that we're not going to be held hostage by one inflation print. So clearly in that trade-off between growth and inflation, The ECB at the moment is feeling that even though we might be handing into a period of inflation undershooting, that growth resilience makes them feel confident that we will revert back to 2% in a sustainable manner.
00:07:52
Speaker
So inflation undershooting or the prospect of it, you know, ah is one consideration for the ECB. And one potential thing that could drive that is the strength in the euro. We're importing disinflation from abroad.
00:08:05
Speaker
That came up in the press conference. What have we got to say about that? Absolutely. and And surprisingly, Christine Lagarde did respond to that question. Typically, the ACB answer is ah we did not discuss the exchange rate. And this time, Christine Lagarde said we did discuss the exchange rate, of course, only insofar as ah its impact on growth and inflation, which are the things that the ACB would
Euro Exchange Rate and Economic Implications
00:08:26
Speaker
care about. ah But the thing that Christine Lagarde noted was that at least ah what we've seen, ah particularly since last summer, has been pretty much a trained range ah and for the euro. So we obviously have seen a large appreciation of the euro last spring on the back of US tariff announcement and the large German fiscal package ah announced. ah But since then, the movement has been minimal and so she' has been sort of dismissing ah at least what we've seen so far in terms of the potential implication on growth and inflation. Of course, she did suggest that the ECB keeps monitoring those and certainly what happens ah at the other side of the pond will be of great interest.
Potential Fed Chair Impacts
00:09:03
Speaker
And actually, Chris, you did write ah this week ah about that and about the implication of the new Fed Governor Kevin Warsh on those things. So it might be interesting to hear from you on that side.
00:09:15
Speaker
I did, yes. So it's interesting that both Andrew Bailey at the Bank of England, Christine Lagarde at the ECB were asked about Kevin Walsh. And of course, they said, we welcome the nominee to become the new Fed chair. They both said, well, we've known him for a very long time. You know, there was praise. But that still means there's uncertainty about what's going to happen at the Fed. And that can pose some risks potentially. about what happens in terms of US monetary policy, which could have some spillover effects elsewhere. So in terms of European implications of Kevin Walsh as Fed chair, we've looked at three different things. you know The first is, what if you do have big US rate cuts? Might you see the dollar weaken? Might you see disinflation imported into Europe? I don't think we put a tremendous amount of weight on those risks. You need some pretty hefty US rate cuts, I think, to really move the dial ah for Europe. But nevertheless, it's a risk worth considering. I think the thing that's become a little bit more pertinent with the nomination of Kevin Walsh is, well,
00:10:11
Speaker
We have talked about the possibility of a shrinkage in the Federal Reserve's balance sheet. What if that raises long term interest rates? That could be a challenge for fiscal policymakers in Europe, also a challenge for central banks when they think about their own balance sheet policies. um But what if there's a combination of both of those things, you know, rate cuts, QT in the US, And you add on broader economic uncertainties to do with Federal Reserve independence. Now, we see it very much as a tale is. But if you have a conflagration related to all of that, do you get a whole load of market volatility? Do you get economic spillovers from
Closing Remarks
00:10:50
Speaker
all of that? Then that really could kind of affect things around the world and Europe included. So it wasn't such a dull week at all. So thank you very much, Liz and Fabio. Thank you. you.
00:11:05
Speaker
A few quick notices before we go. Don't forget that you can keep up to date on all of our latest reports, videos and podcasts from HSBC Global Investment Research by downloading our app from Apple's App Store or Google Play.
00:11:20
Speaker
If you'd like to know more about what's happening in Asia, then listen to our sister podcast, Under the Banyan Tree, where hosts Fred Newman and Harold van der Linde put the region's economies and markets in perspective.
00:11:33
Speaker
And if you've got any questions or comments, then you can get in touch with us at askresearchathsbc.com. So that's all we have time for. This week's podcast was hosted by me, Chris Hare, and produced by Tom Barton. Don't forget to like and subscribe to The Macro Brief wherever you get your podcasts.
00:11:52
Speaker
Thanks very much for listening. We'll be back next week.