Markets Focus On Fed, BoE Rate Decisions, UK CPI Falls

The US Federal Reserve (Fed) and the Bank of England (BoE) interest rate decisions stand out from the crowd of important financial updates for the rest of this week as investors and traders will be keen to see how these two major central banks plan to adjust their monetary policies.

The week started with a bang as the Bank of Japan (BoJ) raised its short-term interest rates to 0% to 0.1% from -0.1% for the first time after many years, marking a pivot in its strategy. As a result of this landmark decision, the Japanese yen hovers around a four-month low against the US dollar.

Federal Reserve Interest Rate Decision

The Fed board will announce its decision on interest rates on Wednesday afternoon. Economists suggest that the Fed won’t lower borrowing costs after its board meeting as it will likely wait to see more concrete evidence related to the downward trajectory of inflation in the country.

The CME FedWatch Tool seems to be in line with the forecast mentioned as it gives 99% chance for the benchmark interest rate to remain unchanged today. Speaking to CBS News, economists at Commonwealth Financial Network said that "the Fed is going to be taking a lot of the oxygen out of the room this week as they conclude their March meeting on Wednesday afternoon. We've seen some mixed economic data to start the year. It's going to be interesting to see how the Fed reacts to that, especially in Fed Chair Jerome Powell's post-meeting press conference."

Goldman Sachs economists said they forecast three cuts in 2024, down from its earlier forecast for four cuts this year.

Bank Of England Interest Rate Decision

The Bank of England’s Monetary Policy Committee (MPC) is expected to announce its rate decision on Thursday afternoon. The so-called “Super Thursday” probably won’t include any significant changes on monetary policy as economists suggest that the BoE is poised to retain borrowing costs to the current 16-year high.

Nomura’s market analysts were quoted by Yahoo Finance saying that “market pricing for the ECB, and to a lesser extent the BoE, has been largely driven by Fed rate expectations. Market participants believe other central banks have a 'fear of going first', but we think the macroeconomic cycles in the US and Europe are decoupling, which justifies the ECB and BoE going it alone and cutting rates independently of the Fed.”

Deutsche Bank economists noted: “Given weaker growth, weaker inflation, and weaker pay data, we think an 8-1 vote tally now looks more likely — with external MPC member [Swati] Dhingra voting for a rate cut. For now, we stick to our May call for the first rate cut. But our conviction levels have fallen, especially with little signalling from the MPC on when rate cuts could begin.”

UK CPI Inflation Drops In February

CPI inflation in the UK dropped to 3.4% in February although analysts had expected inflation to come in at 3.5%. It should be noted that the UK CPI stood at 4% in January. February’s figure is the lowest recorded since September 2021. The Office for National Statistics (ONS) report also showed core CPI (excludes energy, tobacco, alcohol and food) dropping to 4.5% from January’s 5.1%.

The UK Chancellor, Jeremy Hunt, said that “this sets the scene for better economic conditions, which could allow further progress on our ambition to boost growth.” The British pound lost some ground against its competitors on Wednesday morning as lower than anticipated CPI inflation may prompt the Bank of England (BoE) to consider reducing borrowing costs earlier than expected.

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