Thames Water in the Sewer

Yesterday Central Bank Policy Makers met in Sintra, Portugal for third day of the ECB Symposium. The main event took place at 1430 where Powell, Bailey, Ueda and Lagarde took centre stage to discuss financial conditions. The general tone was hawkish as policy makers across the board reiterated the persistence of elevated inflation and the need to maintain tight monetary policy. For example, on the topic of monetary conditions, Powell stated that “although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough”. Given the release of the Fed’s dot plot shortly after their decision pause on 14 June (which left the fed funds target rate at 5%-5.25%), Powell reiterated that the “strong majority for two more rate hikes in dot plot”. As such, the Fed could be looking a funds target rate of 5.5%-5.75%.

This came as Bailey – a little more cryptically – stated that “[Markets] have a number of further increases priced in for us, and my response to that would be, well we will see”. Money markets are currently pricing in an implied terminal rate of 6.09%, as core core inflation is now at highest level since 1992. Regarding the BoE’s 50bps rate hike on 22 June, Bailey stated that “the cumulative data – both particularly on the labour market and on the inflation release we had, which to us showed clear signs of persistence – caused us to conclude that we had to make really quite a strong move“. Their decision to raise the main benchmark rate to fresh 2008 highs followed the UK’s inflation print which which saw headline inflation (annualised) for may remain at 8.7% vs estimated 8.4%.

With Bailey and Powell sharing comments on the prospect of further hikes, Lagarde too indicated that Frankfurt would likely conduct further tightening. Here she stated that “if the baseline stands, we know we will likely hike again in July”. Over the course of the symposium, Frankfurt have pushed back against market projections of H1 2024 cut and markets continue to question whether the ECB will raise rates in September too. On the topic of inflation, Lagarde cautioned that “we are not seeing enough tangible evidence of falling underlying inflation”. Of course, these comments come as Eurozone core inflation is just 40bps down from all-time peak.