After the two North American central bank meetings last week, which included a balanced but positive tone from the Fed, we get the two big European central bank meetings on Thursday. Truth be told, they are both likely to be relatively quiet affairs, as interest rates are very close to neutral, and ratesetters continue to closely watch economic data in order to decide the level of interest rates in the months ahead. Elevated geopolitical tensions have brought a higher level of uncertainty to policy making, but central bankers are cautious in nature with no surprises expected from them in London and Brussels on Thursday.
Bank of England – Caution amid a divided MPC
The Bank of England is set to keep rates unchanged at 3.75%. At the December meeting, the MPC cut by a narrow 5-4 vote, but the vote split this time should be 7-2, with two officials voting for a rate cut. There is a chance that Ramsden could join Dhingra and Taylor, which would be one for the dovish team, though his comments after the December meeting hinted at a pause.
Recent data has given the hawks some ammo as GDP jumped 0.3% in November beating expectations, January PMIs hit their highest since spring 2024 and December CPI surprised to the upside at 3.4%. On the flip side, private sector pay growth eased to 3.6% at the start of the year, job losses accelerated and hiring surveys are still getting worse. Indeed, wages may fall further to 3% within months. That would be in line with pre-Covid averages – when the jobs market was heating up, but interest rates were considerably lower.
Ultimately, the bank is on hold until it sees more concrete signs of falling inflation. Some economists think that this could happen quite soon, due to lower food and water prices, plus core services inflation cooling in May. Fresh new economic forecasts are also released.
A dovish Bailey who puts a cut on the table for next month would open the door to GBP weakness, with cable falling closer to January highs around 1.3550. But hawkish sticky inflation and wage concerns talk would lift gilt yields and GBP. The major might find support around the September top around 1.37. Markets have reined in rate cut bets in recent weeks, with roughly 22bps priced in by June, and 37bps by year-end.
ECB Meeting – Eurozone resilience keep policy in a ‘good place’ mode
As noted, the ECB meeting should be a pretty quiet “on hold” affair, with the deposit rate widely expected to stay at 2.0% and no change to policy guidance. President Lagarde is likely to repeat the usual lines: policy is in a “good place”, decisions will stay data‑dependent, and the central bank will continue to adopt a meeting‑by‑meeting approach, with no pre‑commitment to cuts or hikes.
There are probably three areas to note. Firstly, staff projections have inflation drifting modestly below 2% in 2026–27, but services inflation is proving sticky and growth is soft but not collapsing. Lagarde will likely say the ECB can “look through” near‑term energy‑driven disinflation while keeping a close eye on wages.
Secondly, there is much chatter about the strong euro and tariffs. The recent “sell America” trade and mixed messaging from President Trump and US Secretary Bessent pushed EUR/USD above 1.20, the highest since 2021. A weak euro causes a tightening in financial conditions and adds downside pressure to inflation. In fact, we heard murmurs from a few ECB doves warning last week of an inflation downside miss, if the euro continued to appreciate. That said, Lagarde will very likely insist that the ECB doesn’t target FX and cite the nominal effective exchange rate which is only modestly stronger. Of course, markets will listen carefully to any hint that euro strength is complicating the ECB’s job.
Finally, any guidance and timing of the next move will be key although is highly unlikely. Money markets price no change for the foreseeable future and virtually no easing for 2026. The debate is more about when the next move might come (likely a hike, but only in 2027+), than about imminent cuts. A very balanced tone should keep the euro broadly range‑bound unless Lagarde surprises.