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Europe’s Central Bankers on Alert as Fed Chair Powell Takes Dovish Stance


Europe’s central bankers may be privately cursing Federal Reserve Chair Jerome Powell for the dovish press conference he delivered on Wednesday. His remarks have raised concerns and prompted questions about the path that central banks in Europe, particularly the European Central Bank (ECB) and the Bank of England, will take in response.

ECB President Christine Lagarde’s Response

At the post-decision press conference on Thursday, ECB President Christine Lagarde voiced her skepticism. In response to repeated inquiries about Powell’s tone, an ailing Lagarde asked, “Who wants to hang on for too long?” While emphasizing that the ECB wasn’t inclined to “lower our guard,” she adamantly stated that the governing council did not discuss rate cuts.

Bank of England Governor Andrew Bailey’s Stance

Unlike Lagarde, Bank of England Governor Andrew Bailey did not face similar questions. However, Bailey made his stance clear through a letter, a video message, and the minutes of the U.K.’s central bank meeting. He firmly asserted that it was not time to declare an end to the era of high interest rates. Despite acknowledging the progress made over the year, Bailey highlighted that there is still a journey ahead.

Inflation Levels in Euro Area and UK

Both the euro area and the U.K. have experienced a decline in inflation, although U.K. inflation remains stubbornly high, surpassing the central bank’s 2% target by more than double.

Market Expectations

Financial markets are anticipating aggressive rate cuts from both the ECB and the Bank of England. For 2024, six rate cuts are expected, while in the U.K., market forecasts predict five cuts in the coming year.

Central Banks Resisting Rate Cuts: A Bold Move

Central bank chiefs around the world have taken a stand against the growing expectation of further interest rate cuts. The Bank of England, in particular, is determined to push back against market pricing that suggests more cuts are on the horizon.

Nomura economists, led by George Buckley, believe that the Bank of England is keen to avoid fueling the fire of additional rate cuts. Their recent actions have successfully countered the prevailing sentiment in the market.

One notable side effect of this hawkish stance is the impact on currency markets. The euro and the pound have both strengthened against the dollar. However, it seems that European Central Bank President Christine Lagarde and Bank of England Governor Andrew Bailey are primarily focused on combating high wages, rather than imported inflation.

Matthew Ryan, the head of market strategy at Ebury, echoes this sentiment. He emphasizes that while the European Central Bank and the Bank of England maintain a firm position, indicating that lower rates are not imminent, the Federal Reserve in the US is leaning towards a more aggressive approach to policy easing.

This divergence in central banks’ strategies has resulted in a clear negative impact on the dollar. In fact, the greenback has already declined by nearly 2% against its major counterparts this week.

While time will reveal who has adopted the correct approach, it is evident that central banks are making bold moves to resist further rate cuts. Their actions aim to maintain stability and guard against potential economic challenges in the coming months.

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