Core inflation persistence to trigger ECB/BoE tighter for longer

In breve

Last autumn the inflation tsunami peaked in the major Western economies. But since then, the development became somewhat more heterogeneous.

Highlights:

 

  • The recent bold hike by the BoE (50 bps) and hawkish comments from the ECB at the Sintra meeting have fostered market suspicion that another round of inflation-induced monetary tightening might be in the offing. 
  • While energy and food prices will increasingly provide relief and the influence of “greedflation” is expected to abate, wage growth will remain elevated due to tight labour markets. This will keep underlying inflation stubbornly high.
  • Accordingly, core inflation is likely to “overshoot” the ECB’s and BoE’s targets. Thus, given hawkish Sintra comments, we now expect the ECB to hike to 4%; the BoE to raise to 5.75%. Both central banks will keep their peak rates well into H2 2024. 
  • Notwithstanding the expected key rate hikes, a sustainable rise in Gilt and Bund yields is not on the cards. On a hedged basis, a historically high yield gap makes very long-dated Gilts attractive for euro investors.
     

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Core inflation persistence to trigger ECB/BoE tighter for longer
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