- United States: the surge in inflation to a multi-decade high is compressing real incomes and could negatively impact consumer confidence, spending and saving behaviour, as some surveys seem to expect. At the same time, companies’ capex intentions remain high, suggesting that, while US consumption may be decelerating, capex should remain resilient for the first part of the year at least. We expect GDP to move to potential towards yearend while headline inflation is currently peaking and should start to moderate, while remaining well above the Fed’s target for the entire year .
- Eurozone: the increase in energy and commodity prices continues to weigh on households and businesses as the Ukraine war drags on, putting the recovery of domestic demand on hold and increasing the risks of technical recession in some countries. At the same time, supply-chain disruptions are returning, while risks of gas and energy rationing are exacerbating concerns among producers. Supply and energy-driven inflation will rise further for a few months before starting a progressive deceleration under the assumption of lower energy and commodity prices in the second half of the year.
- United Kingdom: high energy prices, faltering confidence, and an extended war have once again pushed our inflation forecast higher and our growth forecast lower. As inflation dents purchasing power and company margins, growth is expected to remain quite weak for a couple of quarters at least. Given the weaker growth outlook, concerns over a tight labour market becoming tighter may be easing, although labour supply may be structurally lower than before. Inflation is expected to peak in April and then start decelerating, although it is expected to remain significantly high by historical standards.
- Japan: Japan remains the exception that continues to register mild consumer inflation amid rising global food and energy prices. Both temporary technical factors and lacklustre demand are responsible for its missing hi-flation. Technical factors – such as the reduction of mobile phone charges in April 2020 and rebasing in August – will start to recede and add about 1 ppt back to CPI. Meanwhile, the economy has struggled to recover from the double hit from the consumption tax hike (in late 2019) and then Covid. GDP has yet to come back to its pre-Covid level, and the case for a strong recovery ahead is still weak.
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- Fed: The March FOMC minutes revealed some of the key parameters of the balance sheet reduction process: 1) the monthly cap will likely be set at $95bn ($60bn for TSY and -$35bn for MBS); and 2) the caps will be phased in over a period of around three months. The minutes also indicated strong support for 50 bp increases in the policy rate at future meetings if inflationary pressures remain elevated. It supports our view that the FOMC will hike rates by 50 bp in May and June. There is also a high probability that the FOMC continues to hike rates by 50 bp at subsequent meetings, until it reaches the 2.5% level considered as neutral. The Fed should then move into restrictive territory, to reach a terminal rate of 3%-3.25%.
- ECB: In April, the ECB failed to deliver additional hawkish surprises, following the ones delivered in previous meetings. The timing for the end of QE in Q3 was confirmed, while the ECB’s rates guidance and the sequence between the end of QE and rate normalisation were confirmed, too. The ECB is determined to deliver on its price stability mandate, but it acknowledged the high level of uncertainty, and the path of monetary policy will therefore be even more datadependent. Our baseline scenario points to QE likely ending in July, followed by two rate hikes before year end, and by a third in Q1.
- BoJ: In strong contrast to its peers, the BoJ is staying unwaveringly dovish and disregarding the sharp movement in the yen. Speculations had built up before the April meeting that the BoJ could start to fine-tune its communication by adjusting its forward guidance. Instead, it maintained its forward guidance and introduced daily fixed-rate purchases to defend its YCC. The inclusion of a new core inflation forecast in the outlook report suggests that the BoJ expects underlying inflation to stay subdued throughout FY2022-23 and is not in a rush to change its YCC target.
- BoE: By a large majority of 8 to 1 members, the BoE increased its Bank Rate by 25bps to 0.75% in March, its third consecutive policy meeting hike, which brought the policy rate back to prepandemic levels. We expect the BoE to raise rates to 1.0% at the next meeting, in order to begin active QT. At the same time, the recent, more dovish tone suggests that the Monetary Policy Committee expects a more delicate balancing act in the trade-off between high inflation and risks to growth. Thereafter a pause may come after the next hike.
