The Ankara roller coaster

The central banks of the United States, Europe, England and Norway, and even our own Swiss National Bank, held meetings this week. As the pandemic rages on, reinvigorated this time by the Omicron variant, central banks have generally revised inflation forecasts up and growth forecasts down. What follows is a brief overview of the main announcements.

At the beginning of the week, the Fed took the lead with its monetary policy meeting. It came after hawkish comments from recently reappointed Chairman Jerome Powell, who indicated that inflation was in the end less transitory than initially expected. And as expected, the American central bank sent clear signals of a coming monetary tightening. Not only did it double the pace of the tapering ($30 billion per month), but it also indicated through the ‘dot plots’ that it now expects three rate hikes in 2022 and three rate hikes in 2023. The market had anticipated this tightening and the dollar and bond yields experienced a short-lived rise on this announcement. The news in the United States is also marked by two major political events: on the one hand, the raising of the debt ceiling, which allows the United States to finance its spending until 2023, and on the other hand, the about-face by Senator Joe Manchin (D-W.Va), who refused to vote for the government’s massive ‘Build Back Better’ plan precisely because of the fear of its repercussions on the debt and inflation.

The day after the Fed’s meeting, the European Central Bank also announced it would be reducing the pandemic emergency purchase programme (PEPP) starting in the first quarter of 2022. However, at this stage, no rate hike is envisaged even though the annualised inflation rate stands at 4.9%. The ECB lowered its growth forecast for 2022 to 4.2% from 4.6%.

The surprise came, however, from the Bank of England, which decided to raise its key rate from 0.10%, its historic low, to 0.25%. In the UK, inflation rose to 5.1%, a 10-year high. The British pound also rose at the time of the announcement before returning to its usual levels of December, around 1.33 to the dollar.

Last Thursday, in line with market expectations, the Norwegian central bank also raised its benchmark rate from 0.25% to 0.50%. In September, the Norges Bank had been one of the first central banks of a developed country to raise rates since the beginning of the pandemic. In its press release, the central bank said it was considering a further hike in March, unless the spread of the Omicron variant leads to restrictions that disrupt economic activity.

The Swiss central bank remained ultra-accommodating, leaving its benchmark rate unchanged at -0.75% as expected. The SNB is comfortable with a strong franc that renders imports cheaper. It is noteworthy that prices have increased in Switzerland much less than elsewhere. The SNB is forecasting inflation of 0.6% for this year and 1% next year. Last Friday, as the Swiss franc got even stronger, the dollar fell below CHF 0.92 and the euro below CHF 1.04. Since then, the Swiss franc has lost some ground and is trading at 0.9250 and 1.0420, respectively.

Unlike most other central banks, China decided to lower one of its benchmark rates very slightly. This measure shows that the government is trying to support its economy weakened by the crisis in the real estate sector

And it has been an extremely volatile week for the Turkish lira. After falling sharply since the beginning of the year, it plummeted again on Monday when president Recep Tayyip Erdoğan declared that interest rates would not be raised. The currency then reached a low of 18.36 against the greenback. It traded at 1 dollar for about 8 TRY at the beginning of the year. In the afternoon, Mr Erdoğan announced a series of complex measures to support the national currency indirectly. The Turkish currency rebounded strongly to stabilise slightly below 13.

In commodities, gold rose this week from $1,760 to $1,810 per ounce before stabilizing at its average level of around $1,780. Oil had a volatile day yesterday with the barrel falling to 66 dollars before rebounding to 71 dollars. Finally, the price of gas in Europe reached a new all-time high amid geopolitical tensions between Russia and gas-importing Europe.