BoE likely to raise rates by a final 25bps taking Bank Rate to 4.25%
The main event in the UK today will be the BoE’s monetary policy announcement. While the MPC again hiked Bank Rate by 50bps at the previous meeting in February, its updated forward guidance and economic projections – which suggested that inflation will fall significantly below the 2% target from Q224 on – made clear that the end of the tightening cycle might be near. Last week’s BoE public inflation attitudes survey pointed to a moderation in price expectations to the lowest rates since 2021, and an additional easing in expectations for wage growth over the coming twelve months. Wariness at possible adverse spillovers from recent stress in certain US banks and Credit Suisse would also call for caution on interest rates. However, taken together with the significant relaxation of the fiscal stance in last week’s Budget, yesterday’s inflation numbers – particularly with respect to services – will likely have been strong enough to convince the majority on the MPC that additional monetary tightening is required. As such, while we will again see at least two members voting to keep rates unchanged, and might still see at least one member vote for another hike of 50bps, we expect the majority on the MPC to vote to slow the pace of rate increase to 25bps, taking Bank Rate to 4.25%, where we still think the current tightening cycle will conclude.

Reuters Tankan signals persisting divergence in manufacturing and non-manufacturing conditions
Ahead of the BoJ‘s comprehensive quarterly Tankan survey at the start of April, today’s monthly Reuters Tankan results again flagged the contrast in business conditions faced by Japanese manufacturers and non-manufacturers. Certainly, large manufacturers remained pessimistic about the current situation, amid concerns about slowing global growth, with the headline diffusion index for the sector at -3 in March, just 2pts higher than last month, and some 11pts below the level at the end of Q422. The weakness was most marked in the steel and metals sub-sector, with the respective index down 27pts to -36, the lowest level since the start of 2021. Firms in the electrical machinery, textile and oil subsectors were also still pessimistic. In contrast, auto manufacturers were more upbeat in March, registering only the second positive reading in the sector since August 2021, likely reflecting an easing in supply bottlenecks and perhaps also Chinese reopening. Non-manufacturers on the whole considered conditions to be more buoyant in March too, with the headline sentiment index up 4pts on the month to 21, the second-highest reading since the consumption tax hike in October 2019. The improvement in sentiment was most striking in retailing, where the respective index rose 19pts to 33, the highest since September 2019. Nevertheless, over the first quarter as whole, today’s survey suggests that the equivalent BoJ Tankan non-manufacturing index will be little changed from Q4.

Euro area consumer confidence index likely to report at-best modest improvement in March
In the euro area, this afternoon will bring the Commission’s flash consumer confidence index for March, which might well see a moderation in the recovery momentum at the end of the first quarter amid ongoing uncertainties. Certainly, there were mixed messages from the March consumer surveys from the Low Countries, the first to be published so far by the euro area member states. The Dutch survey was more encouraging than of late, with the headline index up 5pts to -39, the highest reading for a year, with household expectations for the economy over the coming twelve months the highest since November 2021 and the index of willingness to buy the highest since last May. But in Belgium, households were a touch more downbeat in March, with the index down 1pt to -9, just below the long-run average but nevertheless still some 18pts above last year’s trough.

Fed expects tighter credit conditions to weigh on economic activity and inflation
As expected, yesterday evening the Fed hiked by 25bps to take the fed funds rate target range to 4.75-5.00%. But while the statement signalled that the FOMC remains focussed on reducing inflation, it also asserted that recent events “are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation”. So, the Committee had less conviction with respect to the need for further tightening, stating that “some additional policy firming may be appropriate”, a downgrade from last month’s “ongoing increases in the target range will be appropriate.” The updated dot-plot left unchanged the FOMC members’ median forecast of the fed funds rate for end-2023 from that in December, at 5.1%, which would imply just one more hike this year. The median forecast for end-2024 was nudged higher by just 20bps to 4.3%. Looking ahead, today will bring the usual weekly jobless claims figures, as well as new home sales figures for February and the Kansas Fed national activity indices for March.