Second, the UK repricing looks strange. Interest rates are now seen more than a percentage point higher in a year’s time than before the war – around 40bp more than the equivalent ECB repricing.
That partly reflects the experience of 2022, when Britain emerged with a bigger and more persistent inflation problem. The UK is often described as being particularly sensitive to energy shocks.
That’s only half right.
Yes, Britain is among the most reliant on natural gas, which makes up around 32% of total energy consumption, compared with 20% in Germany and 15% in France. But this is not a gas crisis – at least not yet. Natural gas prices have remained far more contained than in 2022.
Look at net energy imports, and the UK actually scores better than much of Europe. Net all that out, and my UK inflation forecasts look virtually identical to our eurozone numbers.
Third, the Bank of England is less likely to deliver two rate hikes than the ECB. Given what I’ve just said, it seems strange that markets are pricing a similar amount of tightening for the remainder of this year in both economies.
Not least because the message from both central banks last week was markedly different. The ECB seemed remarkably clear that it was on track to hike rates in June unless the situation dramatically changes. The BoE, by contrast, implied that simply not cutting rates – which it may well have done had the war not happened – already amounts to defacto tightening. The case for hiking above current levels was far less clear-cut.
True, here at ING we expect a one-and-done hike on both sides of the channel. But if you had to ask me if the ECB or BoE were more likely to hike, or tighten more in total, then notwithstanding UK political risks, it seems pretty clear that it’s the former.
Finally, markets still appear to be overplaying the energy channel. Market expectations for the ECB and BoE are still trading very tightly with oil prices. It’s something our Rates Strategy team has repeatedly flagged; the correlation between two-year euro swap rates and Brent crude since the Iran war has stayed very high at 0.83. For natural gas, it’s just 0.22.
