Weekly Update - Central banks: close to "peak" but not yet "pivot"

The recent banking equity turmoil is likely to bring the end of the monetary policy tightening cycle, the "peak", closer. However, central banks communication suggest that they are far from starting to ease, the "pivot", contrary to what market participants seem to anticipate

Continued tightening as if nothing had happened. The main central banks have continued to tighten their policies in recent days. The banking turmoil did not dampen their spirits, on the contrary. They wanted to send a reassuring message about their assessment of financial stability by continuing to raise rates in the context of high inflation. Thus, the European Central Bank raised its rates by 50 basis points, the Federal Reserve and the Bank of England by 25 bp and the Bank of Switzerland even surprised by raising rates by 50 bp. They have each reaffirmed their objective of bringing down inflation, whose latest figures for February have still not really reassured.

The tensions on the banks will encourage more caution in the future. While central banks have been reassuring in the midst of the turmoil, the turbulence will cause them to moderate their future actions. Indeed, while we remain confident that a systemic crisis should be avoided, the current turmoil will have consequences for short and medium term economic developments, which central banks will incorporate into their analysis. First, the tensions mean a higher level of uncertainty. This will weigh on the decisions of all economic actors and thus slow down economic activity. Secondly, the tensions will encourage banks to be more cautious in their provision of credit to the economy, particularly the US regional banks. These banks account for 40% of bank lending in the US, which is likely to be increasingly constrained in the future. Central banks will thus be more moderate in their decisions

It seems too early to anticipate a relaxation of monetary conditions. Central banks seem to be close to the end of their tightening cycle (+475 basis points for the Fed, +350 for the ECB and +425 for the Bank of England). The banking turmoil has encouraged market participants to anticipate that they could start cutting rates in the coming months. The easing of commodity prices would allow total inflation to fall rapidly across the board, which could be a step in the right direction. However, underlying inflationary pressures may take time to moderate. This will prompt central banks to adopt a more wait-and-see stance than the markets are anticipating. 

Finally, in the main events of the week, we have chosen to talk about the European PMI indicators and to focus on the wage increase in Japan.

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