I had to double-check my Bloomberg screen. But it was there indeed, Dutch central bank chief Knot indicated in a recent Bloomberg interview that further monetary tightening after the ECB meeting in July is anything but guaranteed. And that, coming from the most hawkish member of the ECB’s Governing Council.
On the other side of the Atlantic Ocean, Jim Bullard, long seen as the Fed’s biggest hawk, is on his way out. He will become the dean of Purdue University from August 15th. Incidentally, Bullard did not vote in the FOMC meetings this year. Of course, he was allowed to put dots in the Fed’s Dot Plot, but this year Bullard could no longer be identified as a hawk there either.
But returning to Knot, his idea is not at all strange. The European Central Bank’s monetary policy makers have collectively been looking in the rear-view mirror in recent months. They were completely wrong when inflation hit stratospheric levels. Monetary policy this year has primarily been a reflection of central bankers’ fear of making the same mistake again.
Regaining courage?
Perhaps Knot has regained his courage and dares to look forward again. There he sees that if historical relationships apply even slightly, inflation will drop sharply after the summer. This mainly concerns headline inflation, but core inflation will also decline. And with moderate or even negative economic growth, it can happen quickly. Ironically, inflation may rise first in the summer months due to strong price increases in holiday-related services. In Sweden, for example, the prices of rental cars, flight tickets, and package tours rose by more than 20 percent in June.
If the ECB indeed stops after July, the chance of a traditional policy error decreases. However, this is not immediately good news for stock markets. History shows that a correction often begins after central banks have ended their tightening cycle.
Jeroen Blokland is the founder of True Insights, a platform that offers independent research to compose diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His chart of the week appears every Thursday on Investment Officer.