The Federal Reserve is on a different monetary planet from the rest of the world, according to Credit Suisse UK Economist Robert Barrie.
At a time when the ECB is expected to follow the lead of many emerging market central banks and raise rates, the US central bank is a long way from hiking rates as it instead debates when, and at what pace, to end quantitative easing, the easy money policy it put in place in response to the financial crisis.
“It’s been clear to us for some time that, rightly or wrongly, the US is on a different monetary planet from the rest of the world,” Barrie wrote in a note to clients.
“What is now becoming clear, however, is the extent to which the ECB has become more decisive at the same time as the UK authorities have become more uncertain,” he added.
Barrie expects the ECB to follow up this week’s 25 basis point rise with a further hike before the summer break and to keep hiking rates “until policy is merely very accommodating, which might mean a zero to slightly positive real rate.”
The Bank of England is now so uncertain over the health of the UK economy that it will not raise rates in May, contrary to the expectations of many, he said.
The central bank's Monetary Policy Committee is taking a big risk by waiting to hike, given high inflation, he said.
“In our view, doing nothing at present is a relatively risky strategy. We have changed our forecast of what the UK authorities will do—not our understanding of what they ought to do,” he wrote.
"We still expect rates to rise later in the year and to end the year at 1 percent rather than 1.25 percent, so, from that point of view, the match has been postponed rather than abandoned,” Barrie added.