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Jamie Jemmeson
December 13, 2021

Will the Bank of England (BoE) Hike amid Headwinds?

BoE meeting postponed

Much of the focus last week was on Plan B restrictions and the claims against the government breaking lockdown rules last December. The big question for the market is on the impact that this will have on the BoE meeting on Thursday. Economic data did little to help the argument for a hike as the UK’s monthly Growth Domestic Product (GDP) for October was released. The data to kickstart Q4 was slightly disappointing at a fairly anaemic growth of 0.1% – well below the forecast of 0.4%. This means economic activity is still down by 0.5% from the start of the pandemic in Feb 2020. The concern is on the introduction of Plan B restrictions further impacting Q4’s growth.

Looking to the week ahead, we have a packed economic calendar and the upcoming meeting on the agenda. In terms of economic data, the employment, inflation, and retail sales data are all set for release this week – all key economic metrics which the central bank pays attention to. On Thursday, the BoE meeting will focus on whether they will raise rates. Last month, the Monetary Policy Committee (MPC) voted 7-2 to keep the Bank rate unchanged at 0.1% in a ‘finely balanced’ decision.

Since then, October’s disappointing GDP data showed a growth of 0.1% while the emergence of Omicron points to downside risks for the BoE’s forecast of 1% growth for Q4’s GDP. The market is split on whether a hike will happen.

Will the Fed Accelerate its Tapering and what does this Mean for Interest Rates? 

The greenback was very much tied to the risk headlines associated with Omicron. The global financial markets were also higher as signs that Omicron may be less severe than initially expected increased risk sentiments. The economic data remains positive as further labour data continues to paint a positive picture. US JOLTS data registered an increase in job openings to 11.03mn for October from a revised data of 10.6mn last month and well above consensus forecasts of 10.4mn. The data also continues to indicate a tight labour market, although there was a slight moderation in the quits rate. In addition, inflation remains persistent with the yearly figure posting a reading of 6.8% – the highest level since 1982.

As concerns over Omicron start to ease, the markets’ focus will turn to the upcoming meeting for updated guidance over the monetary policy from the Federal Reserve’s (Fed) markets forecast, which expects the Fed to double the taper amount when they meet in December. The current taper pace is at $15 bn per month with the bond-buying programme at $105 bn.

The focus of the week is on the Federal Open Market Committee (FOMC) meeting on Wednesday. Since the Fed also announced the start of Quantitative Easing (QE) last month, it is expected to signal an accelerated pace next week, which would enable asset purchases to end in March. If this happens, it is likely that a hike will be brought forward as shown in the increased probability of a rate hike from 18% to 37% in March.

Could the European Central Bank (ECB) Change its View on Inflation? 

Last week, Olaf Scholz was elected as the next Chancellor by the Bundestag ending an era dominated by Merkel – greater than 16 years. Meanwhile, Greece recorded the highest GDP rate year-on-year (Y.O.Y) in the Eurozone in Q32021. According to Eurostat, Greece’s Q3 GDP grew by 13.7% versus an average growth rate of 3.9% among EU countries.

The German ZEW Index read above forecast yesterday at 29.9 versus an expectation of 25.3. Despite the surprise reading, this represents a decline in economic sentiments among institutional investors relative to November’s 31.7. In contrast, the Eurozone ZEW Economic Sentiment Index showed an increased level of optimism among investors, reading above a forecast of 26.8 and above November’s figure of 25.9. 

Looking to the week ahead, the markets will focus on the ECB meeting on Thursday. The Central Bank is in a different place compared to the BoE and the Fed as asset purchases are expected to continue next year. ECB’s interest rates are not expected to start rising until much later than the UK and US central banks. The recent upside inflation surprises, however, have seen Consumer Price Index (CPI) rising to 4.9% in November – the highest since the inception of the Euro. However, more hawkish members will be concerned that inflation may not decline as quickly as they expected as the current stance from the ECB is that inflation is transitory. The markets will focus on the forecast for growth and inflation moving forward. If these changes, the interest rate outlook could also shift, however.

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