Central banks fight back

What a 24 hours it’s been in financial markets with central banks from across the globe announcing policy changes to head off inflation risks.

The Fed got us underway on Wednesday evening and accelerated its tapering of asset purchases which will now wrap up in the first quarter and allow for rates to start rising shortly after. With the dot plot forecasting three rate hikes next year among the majority of policymakers, it was towards the hawkish end of expectations, something investors welcomed with open arms.

It’s not often those two things have been said together since the global financial crisis. In fact, it may be a first. The last time the Fed raised rates, it faced strong criticism from some, most notably President Trump. This time, it’s not the possibility of inflation, rather the prospect of it rising out of control that’s prompting the move and clearly, investors fear inflation far more than modest tightening. As they should.

ECB announces an end to PEPP in March

The ECB has a similar challenge, albeit to a far lesser degree. Inflation is the highest it’s ever been at 4.9% but that is expected to ease next year and fall back below target in 2023. Of course, forecasts are subject to significant revisions against the backdrop of enormous uncertainty around omicron and strained supply chains. But the point is that less action will likely be warranted from the ECB compared with others.

As expected, the central bank announced that the PEPP will draw to a close in March but will be offset by a temporary boost to the APP until the fourth quarter. Again, the bank will be flexible with all tools and make adjustments as necessary. This may seem obvious, but it is designed to avoid criticism and confusion at a time when forecasts are subject to such significant revisions. Flexibility is key. As we’re seeing outside of central banks, look at OPEC+.

BoE delivers a surprise rate hike for Christmas

The Bank of England loves to keep us on our toes. Ahead of the November meeting, policymakers including Governor Bailey gave the impression that a rate hike was imminent. At the meeting, which occurred alongside the release of the quarterly monetary policy report – a time when most expect policy changes to occur – the MPC voted strongly against a hike and left investors confused and frustrated.

This month, many agreed that a hike was arguably warranted. The end of the furlough scheme had a minimal impact on the labour market, which remains extremely tight, while wages and inflation are accelerating faster than expected. But the uncertainty around the omicron variant made most believe that the MPC would hold off until February. And once again, they were wrong.

Ultimately, it makes little difference. A 15 basis point rate hike is nothing. It’s more a warning to everyone that a tightening cycle is underway and the central bank will not turn a blind eye to inflation. Markets are pricing in a slightly faster pace of hikes, with the base rate seen at around 1% by the end of next year. And the pound is a little higher on the back of the decision, along with the euro. But the takeaway is clear, the major central banks around the world accept that inflation isn’t going away soon and are now willing to tackle it head-on.

Erdogan and the CBRT continue to pile misery on the lira and those that rely on it

Which brings us to the CBRT. The anomaly. A central bank that’s on a different planet to the rest of us and putting President Erdogan’s unorthodox monetary policy beliefs into action. And the outcome is as predictable as it is disastrous. Another 100 basis point rate cut today brought the repo rate to 14%, down 5% since September. With inflation at 21.31% and rising, and the lira plunging to new lows once again, off more than 5% against the dollar today, darker days lie ahead for the country.

President Erdogan and the central bank may claim not to care about the currency woes, with the former staunchly defending the actions, while lambasting and sacking those calling for higher rates, the numerous unsuccessful interventions in the currency markets recently tell a very different story.

In a further sign of complete disregard for inflation, the President vowed to lift the minimum wage next year by 50%. Yet another act of complete desperation to regain control of a disastrous situation of his own making. Another failed experiment that’s going from bad to worse for the country.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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