The European Central Bank (ECB) and the Bank of England (BoE) both raised interest rates by 50 basis points today, to 2.5% and 4% respectively. This was in line with market pricing. 

Both central banks expect headline inflation in their jurisdictions to come down sharply this year. But they remain concerned about persistent core price pressures above the inflation target.  

Nevertheless, there was a notable difference in communication about the outlook for monetary policy from here. 

The ECB all but pre-committed itself to another 50 basis point (bps) hike at its March meeting, although declined to give much guidance beyond that point. Language about “staying the course” suggests the ECB remains in regaining-inflation-credibility mode. We are expecting further rate hikes in March and May, but then rate cuts by year-end. 

By contrast, changes to the BoE’s language suggest it thinks policy rates may now have peaked. We suspect the BoE may be underestimating near-term core inflation pressures from the labour market, so still expect some further hiking. But we then think a cutting cycle will begin in late-2023.