Cash & Liquidity Management
Published  5 MIN READ

Monetary Policy Continues to Drive Markets as Ukraine Invasion Weighs on March Meetings

Northern Trust Asset Management Monthly Market Commentary – Exclusive Insight for TMI Subscribers

Eurozone Market Update

The European Central Bank (ECB) unanimously agreed to leave key interest rates and forward guidance unchanged, along with its December guidance on asset purchases. The ECB expects the next few months to be difficult for economic output before a rebound in the second half of the year. The ECB believes inflation will be below target by the end of 2022, however, the risk is to the upside. Following a hawkish press conference from President Lagarde, the March ECB meeting will be interesting due to its potential for new guidance on rate hikes and asset purchases. The swaps market is now pricing in the potential of three, rather than four, 10 bps hikes by year-end.

UK Market Update

The Bank of England (BoE) delivered the 25 bps rate hike in February as we anticipated, taking the base rate to 0.50%. Surprisingly, four of its nine Monetary Policy Committee (MPC) members dissented, voting to hike rates 50 bps to 0.75%. This followed a sharp upward revision of inflation projections for 2022, with an expected peak of 7.25% in April. Later in February, in testimony to the U.K. Treasury Select Committee, some MPC dissenting voters softened their rhetoric, and noted that their decision was “finely balanced” and that “only really modest tightening is needed to get inflation to target.” The swaps market had been pricing in six 25 bps hikes in 2022, with an 80% chance of a 50 bps hike in March. This has now reduced to five hikes and an 8% chance.