Bank of England, ECB Abandon Hesitation and Dance to Fed’s Tune

(Bloomberg) --

As it turned out, both the Bank of England and the European Central Bank blinked at the traffic lights.

It's hard to believe that the BOE would go from being reluctant to raise rates as recently as November to as many as four members voting for a 50-basis-point increase (it's worth recalling that only two of those four -- Dave Ramsden and Michael Saunders -- had voted in favor of an increase back in November). But there you go. In markets, there is no greater prudence than to let bygones be bygones, and it definitely applies for the BOE.

Given the very hawkish turn at the Federal Reserve since Chair Jerome Powell's re-nomination and the surprise December rate hike from the BOE, I have maintained that four hikes -- one a quarter -- from the BOE this year look eminently doable. Of course, the markets are pricing a lot more than that, and the BOE's script is work in progress.

Over in Frankfurt, the hawks within the governing council have made their presence felt, with President Christine Lagarde refusing to rule out the possibility of a rate hike after expressly remarking just before Christmas that the monetary authority is unlikely to raise rates in 2022.

You could ask with a high degree of legitimacy if things are a lot a different from what they were before the year-end that both central banks should so suddenly discover their hawkish colors. The quiz master may decide that the correct answer comes down to an external reason: a decidedly hawkish turn from the Fed since late last year.

The truth is, we are still in a world led by the U.S., and as goes the Fed, so go the rest of the pack. It's hard to imagine that either central bank would have turned around as quickly as it did but for the Fed playing the Pied Piper with a degree of self-assurance that only the FOMC has traditionally displayed. What else could explain two BOE members who didn't see the need for a 15-basis point increase in November seeing the need for a 50-basis point hike now? What changed from the last weeks of December so dramatically for the ECB to start second-guessing itself?

Whether it is quantitative easing or moving on rates, nothing is really sanctified until the Fed has done it. Few people may even remember that it was Japan that first started experimenting with QE. But it wasn't until Ben Bernanke introduced it that it became a de jure option for the rest. (Of course, it's become a tool that's being used recklessly, but that's a different matter.)

So there you go. What the Fed does in the U.S., doesn't stay within the U.S.

NOTE: This was a post on Bloomberg's Markets Live blog. The observations are those of the blogger and not intended as investment advice. For more markets analysis, go to MLIV on the Bloomberg Terminal.