Think ahead how we could be wrong about central banks

Key arguments

• The ECB's hawkish hold and explicit openness to an October hike surprised ING, but Lagarde's 'longer lasting' inflation claim conflicts with inflation data and corporate pricing surveys.
• Energy shock pass-through may simply be delayed: models suggest 12-18 months for the full effect, and buffers such as airline hedging and fertiliser stockpiling cannot last forever.
• Firms may again underestimate their own pricing power, as happened in the Bank of England's business survey where realised price growth exceeded expected price growth.
• Even with stronger pass-through, workers lack the 2022-era bargaining power, so all roads lead back to the labour market as the inflation arbiter.
• The 'higher neutral rate' thesis rests on slowing workforce growth, rising European defence and German infrastructure spending, and enormous AI-related capital demand; ING finds this strongest for the US but doubts it for Europe.
• Market pricing assumes the ECB deposit rate stays at 3.5% for at least four years, which would require a genuinely higher neutral rate, something Lagarde admits cannot be known in real time.
• ING expects the Fed to hike next week as a one-off recalibration, but is less convinced of the need for more hikes; it expects the Bank of England to hold with a 6-3 vote.

Corresponding source evidence

1. For one thing, Lagarde's assertion that inflation will be "longer lasting" than previously expected stands in sharp contrast to what both the inflation figures and corporate pricing surveys are telling us.
2. Governments may also end up absorbing more of the energy shock if it keeps getting worse, just as they did in 2022, even if that’s hard to believe with the current level of bond yields. · 2022
3. But a world where rates rise and never come down requires a bigger story: a delayed inflation shock, structurally tighter jobs markets and higher neutral rates.