There was a busy schedule of European central bank policy updates yesterday including the latest meetings from the BoE, Riksbank and SNB. The policy updates have had only a modest impact on the FX market. At yesterday’s MPC meeting (click here), the BoE signalled that they are less confident over continuing quarterly rate cuts reflecting heightened uncertainty over the economic outlook.
The majority of MPC members stated that there was no presumption that monetary policy was on a pre-set path over the “next few meetings”.
It highlights that it is not a done deal that the BoE will stick to the current path of quarterly rate cuts by lowering rates by a further 25bps in May. We still expect the BoE to deliver another rate cut in May but expect it to become more challenging to stick to quarterly rate cuts by the August MPC meeting when headline inflation is expected to pick-up to a peak of around 3.75% in Q3. It is a view shared by the UK rate market which is still pricing in around 17bps of cuts for the May MPC meeting but only 32bps in total by the August MPC meeting. A more cautious approach to further BoE easing that keeps UK rates higher for longer is a supportive development for the pound.
While the BoE is still planning to lower rates further both the SNB and Riksbank have likely reached the end of their easing cycle at least in the near-term. The SNB delivered another 25bps rate cut yesterday as expected lowering their policy rate to 0.25%. With the policy rate close to the zero bound again, market participants were watching closely to see the updated policy guidance. SNB President Martin Schlegel stated that “this rate cut has an expansionary impact. In that sense, the probability of additional policy easing is naturally lower”.
He did not completely rule out further rate cuts to the zero bound or back into negative territory but we are assuming that it is not the base case scenario. It would likely require another negative shock and/or a significant strengthening of the Swiss franc to encourage a return to negative rates in Switzerland. Fortunately for the SNB, the Swiss franc has weakened recently in response to the improving outlook for growth in Europe triggered both by plans for a significant loosening of fiscal policy in Germany and building optimism over a ceasefire agreement between Ukraine and Russia.
In contrast to the Swiss franc, the Swedish krona has benefitted the most from those factors and has been the best performing G10 currency this year. The significantly stronger krona provides an offset to the upside inflation surprise in Sweden at the start of this year. The Riksbank indicated yesterday that it views the recent pick-up in inflation as temporary and is happy to leave rates on hold at the current level of 2.25% in the coming years. After recent outsized gains for the krona, there is a higher risk of a reversal lower in the month ahead.
