BOE Pill. The 2nd round effects of inflation may be stronger.

ECB policymaker Makhlouf: I haven't seen second-round effects on inflation emerging

BoE's Greene: Worth waiting before deciding on rate hikes

The desk believes the Bank of England (BoE) is likely to adopt a cautious approach regarding interest rate hikes, particularly in light of geopolitical tensions stemming from the US-Iran conflict. Per the full note [source], BoE's Greene has indicated that while inflation risks are skewed to the upside, the current sluggish economy and loose labor market may mitigate the second-round effects of energy shocks. The market currently prices in a 42% chance of a rate hike in June, which suggests that upcoming economic data will be pivotal in shaping expectations ahead of the meeting.

RBA governor Bullock: We must get on top of inflation now before it gets away from us

The desk interprets RBA Governor Bullock's recent comments as a clear signal that the central bank is prioritizing inflation control amidst external shocks. Per the full note [source], Bullock emphasized the need for vigilance against inflation expectations, suggesting that if second-round effects from current geopolitical tensions manifest, even higher rates may be necessary. This aligns with our view that the RBA's current cash rate, described as somewhat restrictive, leaves room for further adjustments depending on economic developments. The consensus among analysts suggests a cautious approach, with a focus on upcoming data releases to gauge the inflation trajectory.

THINK Ahead: Inflation’s second wave – is history really repeating itself?

Lead — The desk is positioning for a potential resurgence of inflationary pressures reminiscent of historical trends. Per the full note from ING Economics, the analysis suggests that a second wave of inflation could manifest, challenging current market assumptions about the persistence of price stability. The consistency of consumer price increases, particularly in key sectors, emphasizes the risk of inflation not simply being transitory but rather a systemic issue. Supporting evidence includes recent data points indicating that inflation metrics could surpass previous peaks, generating implications for monetary policy shifts. Notably, central banks may be compelled to reassess their strategies, particularly if inflation persists beyond the expected timeline. This could lead to a heightened sensitivity in FX markets, particularly for currencies sensitive to interest rate differentials. The alternative read would involve dismissing inflation fears due to temporary supply chain disruptions. However, the current pricing trends suggest that such disruptions may have longer-lasting effects, thus complicating this narrative.