Fed, ECB and BoE to announce interest rate decisions

Interest rate decisions coming from the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) are going to dominate the news this week. All three of them are likely to raise borrowing costs as their monetary tightening policies aim to ease inflationary pressure. While most economists don’t expect any surprises, hiking interest rates could create market volatility and affect the exchange rates of the US dollar, the euro, and the British pound.

Other upcoming financial data releases include China’s NBS Manufacturing PMI (Dec. 2022), the German retail sales report (Dec. 2022) and the US ISM Manufacturing PMI survey (Jan. 2023).

Fed likely to hike interest rates by 0.25%

On Wednesday February 1st, the US Federal Reserve (Fed) is expected to announce its decision on interest rates. Some economists forecast that the Fed will raise borrowing costs by 0.25%, bringing the target range between 4.5% and 4.75%. In December 2022, the Fed’s Federal Open Market Committee (FOMC) raised the benchmark interest rate by 0.5%, slowing down after four consecutive hikes of 0.75%.

Market analysts suggest that the Fed will likely proceed with smaller rate hikes in the next few months as inflation seems to be dropping according to the latest reports. They note that such a strategy could help balance the risk of reducing inflation without affecting the country’s unemployment rate.

Commenting on the US economy, Commerzbank’s analysts suggested that “the US economy grew strongly by 2.9% in the final quarter of 2022. However, this is likely to be the last strong quarter for a while, especially as the details are already not quite so encouraging. We still expect the economy to slide into recession due to the Fed's massive rate hikes.”

Will the BoE hike rates for the 10th consecutive time?

On Thursday February 2nd, it will be the Bank of England’s turn to announce its decision on interest rates. The BoE’s Monetary Policy Committee (MPC) will likely hike interest rates by 50 basis points to 4%. Economists note that this could be the 10th consecutive rate hike by the BoE.

The country’s economy suffers from record-high inflation that weighs on household and business budgets. However, the BoE’s Governor, Andrew Bailey, told reporters last week that inflation might have made a positive turn after it fell in both November and December.

A report by ING bank suggested that “the UK’s somewhat unique combination of structural worker shortages, and therefore potential for persistently higher wage growth, as well as its exposure to Europe’s energy crisis, suggests the Bank of England will be less quick to cut rates than in the US.”

ECB likely to raise borrowing costs once again

The ECB is expected to follow the BoE in raising interest rates on February 2nd. A Reuters poll showed that economists forecast hikes of 50 basis points at the next two meetings and an eventual rate peak of 3.25% from the current rate of 2%.

The ECB’s head, Christine Lagarde, reiterated last week that inflation in the euro bloc remains too high. Lagarde noted that “we have made it clear that ECB interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive and stay at those levels for as long as necessary.”

The ECB’s governing council member and Governor of the Bank of Ireland, Gabriel Makhlouf, noted that “we need to continue to increase rates at our meeting next week – by taking a similar step to our December decisions – and also at our March meeting, although our future policy decisions need to continue to be data-dependent given the prevailing uncertainty.” The ECB’s board member, Fabio Panetta, told Handelsblatt reporters that the ECB shouldn’t pre-commit to any specific policy move beyond February.

Focus on the US NFP report 

On Friday February 3rd, investors and traders will scrutinise the US Nonfarm Payrolls January report due to be published by the Bureau of Labour Statistics (BLS). In general, a high reading is seen as positive for the US dollar, while a low reading could weaken the currency’s value.

Economists suggest that 175,000 new jobs were added to the US economy in January, down from 223,000 in December. The US unemployment rate is expected to have ticked higher, reaching 3.6%. December’s NFP figure surpassed analysts' expectations, showing that the labour market remained strong despite the Fed’s monetary tightening policy.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.