WOOD Flash – Global macro: forecasts changes

Financial market conditions have deteriorated materially, following the bankruptcy of Silicon Valley Bank (SVB) in the US and the strong strain on Credit Suisse’s (CS) stock price. We believe that these events argue strongly in favour of completing the monetary tightening cycle in the US and the Eurozone sooner than anticipated previously. In the Euro area, the Council may attempt to deliver a final 50bps rate increase at the March meeting, although it would be a bold move, which could risk financial stability, if the communication to the financial markets is not calibrated appropriately. We see it as of the outmost importance that the ECB signals interest rate stability going forward, and a realistic and constructive stance towards lending activity, to facilitate investment. In the US, we assess that the underlying and cyclical conditions for inflation have improved, and the benefits from tightening monetary policy further at this juncture are not sufficient, given the growing downside risks of a broad economic slowdown. Like in the case of the ECB, signalling rate stability provides the best trade off.