BlackRock Investment Institute

Macro insights

Central bank confusion

Central banks have been talking tough on inflation recently, pointing to accelerated rate hikes. Markets are struggling to make sense of it all – not least because raising rates to the level needed to squeeze out inflation would torpedo growth and have little impact on the root cause: supply bottlenecks.

The Bank of England acknowledged monetary policy could do little about the underlying cause, but then said it was essential to raise rates now to curb inflation. The European Central Bank (ECB) also took a hawkish turn by ending asset purchases earlier than expected and declining to rule out a rate hike this year. Yet the ECB also emphasized the euro area is seeing less upward pressure on wages than the U.S. See the chart.

Wage pressures

Chart comparing U.S. and euro are wage pressures

Sources: BlackRock Investment Institute, U.S. Bureau of Labor Statistics, European Central Bank, with data from Haver Analytics, February 2022. Notes: The chart shows year-on-year wage inflation measured by the employment cost index in the U.S., hourly wages and salary costs in the euro area and euro area negotiated wage settlements.

The confusion has resulted in markets pricing in too hawkish a rate path, in our view. We believe central banks could end the confusion if they would make clear that raising rates now is about removing stimulus that’s no longer needed, not about squeezing out inflation caused by supply constraints.

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Elga Bartsch
Head of Macro Research
Read bio
Nicholas Fawcett
Macro Research

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