MAPFRE Economics’ reading on the latest central bank meetings

In the interest of controlling the level of inflation, central banks have been forced to step in. Both the European Central Bank and the Federal Reserve held meetings in the past week with a more aggressive tone, setting a precedent with a view to these bodies’ upcoming decisions.

Specifically, several key aspects were confirmed at the ECB’s “urgent” meeting, according to MAPFRE Economic Research. First, a notably higher inflation forecast and a significantly low economic growth outlook, as anticipated in our recent report, Panorama económico y sectorial 2022: perspectivas hacia el segundo trimestre (2022 Economic and industry outlook: second quarter perspectives), with rising stagflation risks for the Eurozone. Second, in terms of inflation, the first monetary normalization guidelines were announced after a long period of low interest rate levels. And last but not least, the looming fragmentation risk on the path towards monetary neutrality.

Based on all this, the experts at MAPFRE Economics anticipate that, in the short term, Christine Lagarde's foreseen plan will fit in with the synchrony of global monetary tightening, “finding a certain temporary equilibrium and providing some anchoring capacity for the euro in the currency market, albeit at the risk of continuing to weaken its position against the dollar.” However, in the medium and long term, they predict that the possibility of an event affecting spreads “would expose the dilemma of moderating inflation targets versus combating risk premiums.”

What about the Federal Reserve?

While the recent Fed meeting was marked by a series of parallelisms regarding its European counterpart (deceleration, inflation, and market pressures), the underlying reasons continue to show certain differences. On the inflation side, the supply factor continues to show a problem that has yet to be resolved, limited by both exogenous and endogenous factors. Additionally, and despite the negative U.S. GDP figures in the first quarter, MAPFRE Economic Research points out that consumption data showed significant growth, exerting upward pressure on prices and helping “to accelerate the shift towards an economic policy that, to a certain extent, helps to restrict spending plans.”

In line with the Federal Reserve’s expectations, MAPFRE Economics forecasts that the U.S. economy is headed towards a so-called “soft landing,” aligning the supply and demand imbalances that maintain the current prices and moving them toward a manageable environment. “This would trigger a correction in demand, generating a relatively benign outlook for the market,” it indicates. However, the probability of a “hard landing,” “which would reconfigure the supply and demand function,” could increase as the tightening cycle accelerates and tail risks accumulate.