European Convergence
- 13 Mayo 2024 (10 min read)
The Riksbank was the second central bank, after the Swiss National Bank, to cut rates in Western Europe. The Bank of England’s message last week was dovish, consistent in our view with a rate cut in June, or August at the latest, and Bailey’ warning that the BOE may have to cut more than what the market currently expects strengthens our call for a total of three 25-bps cuts this year. The minutes of the ECB’s April meeting were even more explicit than Lagarde in her press conference in telegraphing a rate cut in June, qualified as “plausible”. The scenario of a general “European wave” of monetary easing before the summer, in contrast with a more hesitant Fed, is now stronger.
The risk of undershooting the inflation target and inadvertently bring about an excessive cost to output and employment is creeping up in European policymakers’ minds. While the Riksbank may now be lauded for daring to cut earlier than the ECB despite the weakness of the Krona, the Swedish central bank may have in fact waited for too long before starting to reverse its stance. In a context of recession and significant rise in unemployment, the Riksbank is now forecasting that inflation will fall below 2%. A key dovish message from the Bank of England last week was its new forecast in which inflation would fall significantly below 2% towards the end of the projection horizon if the market’s expected path for monetary policy materialises. The undershooting risk was also one of the arguments used by the doves at the ECB when they called for a cut in April already.
The ECB minutes however pointed to much concern about what the Fed could do in the face of resilient inflation in the US. Given the dominance of the US market, it is natural that European policymakers carefully monitor the macro and policy developments there. But we have been arguing since the beginning of the year that the risks are asymmetric across the Atlantic, with inflation undershooting a potential risk in Europe, against a sizable overshooting risk in the US. Reading Europe with American lenses could lead to costly policy mistakes.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent. Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.