Will Hawks Still Rule the Roost at Europe’s Central Banks?

As European inflation rates converge with targets, markets expect rate cuts. But central banks are set on a decisive victory over inflation.

Across continental Europe and the UK, inflation rates are trending down, with euro-area inflation cooling the fastest among developed-market countries (Display).

Inflation Is Cooling Fastest in the Eurozone

While falling inflation rates have prompted renewed optimism from investors globally, we doubt that key data and central bank policies support imminent policy easing in the UK and Europe. We also believe that markets are now pricing in faster rate cuts than central banks are ready to deliver.

Central Bank Meetings: Bias Remains Hawkish

As expected, the Bank of England (BoE) left the bank rate unchanged at 5.25% at its December meeting. The Monetary Policy Committee again voted six to three in favor of a pause, with the three dissenters voting for a hike. The post-meeting statement was again hawkish: the BoE expects to keep policy restrictive for a long period, retaining the option to hike rates again. And despite recent positive data, key indicators of persistently upward-trending prices—such as services and wage inflation—remain worrisome.

The European Central Bank (ECB) also kept rates on hold, as expected, and its press-release language was also unchanged: core inflation had eased, but the ECB stayed focused on price pressures given strong growth in unit labor costs. And the Governing Council reasserted its determination to keep policy rates at sufficiently restrictive levels for as long as necessary.