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Market To Decipher Bank Of England’s (BoE) Tone For Future Policy Action

The Sterling nudged higher yesterday following the release of some positive economic data. The final UK Purchasing Managers’ Index (PMI) was revised to a 3-month high for October. It was reported that companies are experiencing strong demands and staff shortages which contributed to further upward pressure on costs and prices at the fastest rate on record for over 25 years. In addition, the Nationwide House Price Index (HPI) continues to push higher with the average house price topping £250k for the first time with an increase of 9.9% year-on-year (Y-O-Y).

Speculation is rife that the BoE will increase interest rates today, with markets already discounting a 15 basis points (bps) increase to 0.25%. Expectations have been fuelled in large part by hawkish comments from Governor Bailey and Chief Economist Pill that some action is likely required in response to the ongoing rise in inflationary pressures. However, members of the Monetary Policy Committee (MPC) have also suggested that they are not ready to vote for a hike at this point and would prefer to see more evidence. The market will focus (in particular) on the rhetoric that follows the clues on what will happen next. The market will also decipher the probability of an increase in interest rates next month if they don’t vote for a raise today and the likely route for interest rates in 2022. Sterling’s reaction may be based on this rhetoric.

US Federal Reserve (Fed) Announces It Will Begin Tapering Of Bond Purchases

The Fed announced yesterday that it would begin reducing its $120 billion monthly bond-buying programme by $15 billion per month, starting in November. The announcement is a key milestone as the US economy recovers from the pandemic with inflation levels surging higher. Fed Chair Jerome Powell adopted a flexible tone towards the pace of tapering, which will be adjusted over the coming months in line with the economic outlook.

The move corresponds with other central banks that have indicated that a quicker reaction to rising inflation levels is necessary. The BoE is expected to raise interest rates in the UK today for the first time since 2018. The European Central Bank (ECB) is expected to follow suit next year while the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) announced a tightening of policy.

Ahead of the Fed announcement, data showed that employment in the private sector rose more than expected in October and the economic activity in the service sector expanded at its strongest pace on record with the Institute For Supply Management (ISM) Services PMI jumping to 66.7 from 61.9 in September.

Today, markets’ attention turns to the economic calendar for the release of the trade balance data and the initial jobless claims figures.

Busy Day For European Services Data

The National Bank of Poland surprised markets yesterday with a 75 (bp) interest rate increase in an effort to control surging inflation in the country. This also surprised the majority of economists who expected a 50 bp increase in their forecast, setting Poland’s interest rate at 1.25%. The move represents a new policy stance by Polish rate-setters to control growing inflationary pressures, with inflation in the region at a 20-year high.

Looking ahead to today, we have a plethora of European services PMI from Spain, Italy, Germany, France, and the final European PMI figures. In addition to a busy macro schedule, Christine Lagarde is due to speak this afternoon at a conference hosted by the Centre for Economic Policy Research (CEPR). Her speech will be closely watched to help decipher any hints for future policy adjustment.

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