A substantial portion of investors expect the U.S. Federal Reserve and the European Central Bank (ECB) to keep monetary policy too loose for too long, according to a new Deutsche Bank survey.
In a market sentiment survey of more than 600 investment professionals worldwide, conducted by the German lender between October 6 and 8, 42% expected the Fed to stay slightly too dovish, while 24% anticipated that the central bank would get policy "about right" and 33% foresaw a more hawkish view.
The prospect of a dovish policy error from the ECB was seen as more likely, with 46% expecting policy to remain too accommodative, compared to 26% believing policy across the common currency bloc will be "about right" and 21% seeing a premature or excessive tightening.
Central bank policymakers have been striking a cautious tone in recent weeks, seemingly adopting a "wait-and-see" approach to inflation and the prospect of hiking rates.
However, Bank of England Governor Andrew Bailey gave the clearest hint over the weekend that British interest rates could be raised in the near-term, telling a panel that the Bank "will have to act" on rising inflation.
At its September meeting, the ECB deferred several important decisions to December, but since then, surging energy prices have driven Euro zone inflation to a 13-year high of 3.4% year-on-year, and analysts expect it to continue rising.
Meanwhile, the Bank of England will be tasked with balancing an overall expansion of economic activity against signs of a sharper deceleration in the third quarter, and increasing risks in the fourth.
U.K. GDP rose by just 0.4% in August, with July’s output revised lower to a negative 0.1%. However, the weaker third-quarter growth follows an upward revision across the second to 5.5% annually from 4.8%.
Recent comments from Bailey about the effects of higher inflation expectations have led many analysts to conclude that the central bank is lining up a pre-emptive tightening of policy.
Red hot inflation data has been a key source of speculation that the U.S. Federal Reserve may be forced to hike rates sooner rather than later. Minutes from the latest meeting of the Federal Open Market Committee indicated that the central bank could start tapering its monthly bond-buying in November of this year.
Fed officials have stressed that, even after the start of tapering, it will be some time before interest rate increases begin.
