Central bank week

As the year draws to a close and volumes gradually dry up, the market has now entered a central bank super week. Against the backdrop of soaring inflation, some twenty central banks will hold their monetary policy meetings over the next few days. The Fed today, the European Central Bank, the Bank of England, the SNB and the Norges Bank tomorrow, the Bank of Japan and the Bank of Russia on Friday…the next few days will be intense. Marked divergences in monetary policy are in order. The first to take the stage will be the US Federal Reserve. The market expects the Fed to tighten, i.e. accelerate the tapering of its programme and pave the way for a first rate hike in the first half of 2022. US inflation rose in November by the most since 1982, driven by strong consumer demand and problems in the supply chain. Highly anticipated by investors, the figure – 6.8% on annualised basis – was both the highest in four decades and in line with expectations. Earlier in the month, employment figures were mixed but broadly encouraging.    While 210,000 jobs were created last month against market expectations of 525,000, the unemployment rate fell from 4.6% to 4.2%. As growth picks up again, record-breaking inflation and robust employment figures should therefore lead to changes in the Fed’s monetary governance.

The Bank of England is in a much more difficult situation. Announced as inevitable and imminent by Governor Andrew Bailey, a initial rate hike was postponed at the October meeting due to the rise in infection cases. This weekend, UK Prime Minister Boris Johnson described the spread of the Omicron variant as ‘phenomenal’. It is believed to account for almost 20% of new infections in the country and just caused what may be the its first recorded death in the world. Boris Johnson has not ruled out his government’s imposing new health measures before Christmas, which will inevitably weigh heavily on the central bank’s decision. The British currency is under pressure and is trading at its lowest level of the year against the dollar. It is even falling again against a weakened euro.

The situation is clearer for the ECB, where quantitative stimulus measures and low short-term interest rates will remain in place for many months. Christine Lagarde, among others, has repeatedly stated that rates will not rise in the eurozone next year. At most, the ECB President has said that the end of its emergency programme in March 2022 could be announced at this meeting on 16 December. But this cannot be taken for granted, as the ECB risks withdrawing its main anti-pandemic tool at a time when the fifth wave is hitting the continent.

The market is also impatiently waiting for the Swiss National Bank’s next move. Not that it might change its monetary policy, but its assessment of the strengthening franc will be scrutinised. After having strongly defended the 1.0700 level against the euro, it seemed to settle for a stronger franc and let the parity slide to 1.0400. But last week, the institution was particularly active again. An increase of CHF 2.38 billion in reserves – the largest since May – suggests a return to sustained activity.  As the leading indicators of economic activity in the eurozone deteriorate and inflation remains well above that of Switzerland, the attractiveness of the euro has been greatly reduced and the SNB will have to be particularly convincing if it does not want to see the European currency approach the 1.0235–1.0255 range, which is an important technical support. This represents a 50% retracing of the move from 0.85 to 1.20 seen between March 2015 and June 2018 and it seems to be acting as a magnet on the European currency.

The Central Bank of Russia is expected to raise its benchmark rate again. In recent days, Governor Elvira Nabiullina has wanted to keep all options open by stating that the CBR would consider a hike of up to 100 points in December. But at 8.4%, inflation is now twice as high as the target. Last week, Deputy Governor Alexei Zabotkin mentioned that a 25-point rate hike is unlikely, thereby suggesting that the adjustment will be larger and a 100-point hike to 8.50%, i.e the level of inflation, is now expected. Moreover, the bank is expected to maintain a fairly firm line suggesting further hikes next year.

The Turkish lira found itself in turmoil again at the beginning of the week. The currency fell sharply against the dollar on Monday morning, dropping as low as ₺14.7590 to the dollar after S&P warned that it was changing its outlook on Turkey’s credit rating to negative. The fall led the Turkish Central Bank to intervene in the foreign exchange market, bringing the exchange rate down to ₺13.66. But the respite was short-lived as the parity rose back to ₺14 yesterday and ₺14.63 to the dollar this morning. Tomorrow’s monetary policy meeting of the Central Bank of Turkey is highly anticipated. And despite the pressure on the currency, the market is expecting a further 1% cut in the policy rate.