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Jamie Jemmeson
December 15, 2021

Will a 10-Year High Inflation Force the Bank of England’s (BoE) Hand?

Sterling Remains Under Pressure Amidst Risk Off Tone

The Sterling remained range-bound yesterday as the market focuses on the interest rate decisions from the US, UK, and Eurozone. The latest UK labour-market report recorded a larger than expected decline in jobless claims with the unemployment rate declining from 4.3% to 4.2%. Meanwhile, headline average earnings slowed down from 5.8% to 4.9% but above expectations of 4.6%. The House of Commons also approved the new COVID-19 rules despite the discontent from 99 Conservatives rejecting the plan of implementing new measures.

Today, the Consumer Price Index (CPI) inflation rate increased sharply from 4.2% to 5.1% for November – above the consensus forecasts of 4.7% and the highest rate for just over 10 years. The core rate has also increased from 3.4% to 4.0%. The sharp increase should maintain the pressure for a BoE response in tomorrow’s policy meeting.

Greenback Stands Firm ahead of Key Policy Meeting

The US Dollar remains well-positioned as markets’ attention turns away from Omicron ahead of the Federal Reserve’s (Fed) policy announcement today. The Fed is expected to accelerate the tapering of its bond purchases in response to persistent inflationary pressures in the US. Investors will also give particular attention to the so-called dot-plot. Each dot represents the view of a Fed policymaker for the rate’s target range, which will reveal how policymakers anticipate the timings on interest hikes in the US next year. The markets expect the Fed to end its bond-buying in March and to proceed with one or two rate hikes in 2022.

Yesterday’s economic data showed that producer prices rose by 9.6% yearly in November. The annual inflationary rate was also reported to be at 6.8% in November – the highest since 1982. Elsewhere, the US congress has reportedly agreed to raise the US debt ceiling, lending support to the dollar.

Ahead of the policy announcement, investors will also review November’s Retail Sales Data for updated guidance on consumer spending.

All Eyes on the European Central Bank’s (ECB) Decision

Euro activity remained relatively range-bound yesterday following a baron Eurozone macroeconomic data schedule. And we could expect a single notable data release of the French Final CPI month-on-month (MoM) figures, which should remain unchanged at 0.4%.

Therefore, markets will focus on the ECB policy meeting tomorrow, although, it is widely expected that the Bank will not change the interest rates from 0.00%. The surging European inflation and growing concerns over Omicron will make for an interesting 2022 policy outlook. Given these factors, the Central Bank may require more time to analyse the possible impact of ending its Pandemic Emergency Purchasing Programme (PEPP) which was set up in March 2020 to support the Euro area. It is also due to end in March 2022 with a total value of €1.85 tn.

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