All eyes on Fed, ECB and BoE interest rate decisions
The attention of investors and traders will be drawn to the US Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) monetary policy meetings scheduled for today and tomorrow. Market analysts suggest that the three central banks are likely to raise their benchmark interest rates in order to reduce inflationary pressures. On Friday, market participants will have the opportunity to scrutinise the US Nonfarm Payrolls report.
In other news, Statistics New Zealand announced that the country’s unemployment rate rose to 3.4% in the fourth quarter of 2022, slightly higher than forecast. Commenting on the unemployment rate data, a Westpac report noted that “while the jobs market is coming from a very strong starting point, there is good reason to expect a deterioration in the years ahead. In contrast, wage inflation remains on the rise, and the turning point is likely to come later. We continue to expect a 0.5% increase in the Official Cash Rate later this month."
US Federal Reserve likely to hike interest rates
Later today, the Fed is expected to announce its decision on interest rates. Market analysts expect the Fed to raise borrowing costs by 25 basis points to a range of 4.5% to 4.75%. This would be the lower rate hike since March 2022.
A Financial Times report published on January 30th suggested that the Federal Open Market Committee’s (FOMC) members will maintain a “hawkish” stance, reflecting their will to keep hiking interest rates even though inflation seems to be slowing down according to the latest surveys.
HSBC strategists speaking to Bloomberg on Jan. 30th suggested that the Fed could cut rates by 1.00% before the end of 2023. However, they did note that “there’s an unusual amount of uncertainty about the policy trajectory given how strange this economic cycle has been.”
BoE meeting: One more interest rate hike?
The latest forecasts by economists suggest that the BoE will follow the Federal Reserve in hiking its benchmark interest rate. According to various reports published in the media, the BoE’s Monetary Policy Committee (MPC) will likely raise the rate by 50 basis points, taking it to 4.00%. This would be the second 50 basis points rate hike in a row.
Commenting on the BoE’s monetary policy, some economists said that high wage and service price inflation point to one more rate increase in March, but this time would be 25 basis points.
ECB likely to raise borrowing costs
On Thursday February 2nd, the ECB’s governing board will convene to decide on its monetary policy. The ECB’s head Christine Lagarde stressed in Davos that the bank’s monetary policy should stay the course. According to economists’ forecasts, the euro bloc’s central bank is likely to increase interest rates by 50 basis points to 2.5%.
ING’s analysts noted that “ECB policymakers think they have to kill inflation and will only stop hiking when they see a big improvement in the inflation outlook.” Economists at Rabobank suggested that while the ECB is expected to hike interest rates, policymakers who are fond of an aggressive policy tightening could face backlash as inflation seems to be retreating. Rabobank’s report said that “the ECB’s hawks are still in a strong position, but they no longer have carte blanche with initial signs of easing inflation. The 50bp hike at next week’s meeting has been well-communicated, so focus will be on the path thereafter.”
US Nonfarm Payrolls report expected on Friday
The US Nonfarm Payrolls (NFP) January report published by the Bureau of Labour Statistics (BLS) will be in the spotlight on Friday. Economists forecast that payrolls increased by 187,000 in the first month of 2023. Nonfarm payrolls had increased by 223,000 in December 2022, although a Reuters poll among economists had forecast a rise of 200,000.
The US NFP data release tends to trigger volatility related to the US dollar as a higher than expected figure could boost the currency’s value while a lower than anticipated number could weaken the dollar against other currencies.
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