The Federal Reserve, European Central Bank (ECB), Bank of Japan (BoJ) and Bank of England (BoE) all meet in the week ahead with financial markets wary of any hawkish surprises.
We will preview the Fed’s meeting on Monday. For the rest, we expect the BoJ’s will be the least eventful. Inflation in Japan remains close to zero. Thus, the BoJ is set to keep its deposit rate at -0.10% though it may consider tapering its corporate bond buying as the pandemic eases.
Source: Bank of Singapore, Bloomberg.
In contrast, the BoE decision is a very close call. Officials are keen to lift the Bank Rate from 0.10%. Inflation at 4.2% is well above the BoE’s 2% target and unemployment has fallen to 4.3% as the UK recovers from the pandemic.
Thus, the central bank has been guiding financial markets to prepare for interest rate rises ‘over coming months.’ But the UK government has initiated new activity restrictions to stop Britain’s surge of Omicron cases. Therefore, the BoE looks likely now to stay on hold and wait until its next meeting in February before increasing interest rates, initially by 15bps to 0.25%.
We expect the BoE will still lift its Bank Rate to 0.75% by the end of 2022 even if no hike is made this month. But if officials do raise interest rates in the week ahead, it would be a hawkish surprise. Similarly, the ECB meeting also has the risk of surprising hawkishly. But we think the central bank will still stay dovish in December.
Faced with inflation hitting 4.9% in November, its highest pace in the Eurozone since the 2008 financial crisis as the second chart shows, the ECB is set to end its Pandemic Emergency Purchase Programme as planned in March. But hawkish officials are arguing the ECB’s older quantitative easing Asset Purchase Programme (APP) should not be extended either.
This would lead to an abrupt exit from the ECB’s bond buying in early 2022 to the detriment of risk assets. But we expect President Lagarde will broker a compromise allowing quantitative easing to continue in a flexible manner after March given the risks from the Omicron variant. The ECB would thus continue be dovish in 2022 to the benefit of the region’s financial markets.
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