Central bank rate decisions due

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Another 'crucial' MPC meeting

The Bank of England’s MPC meeting is due this week and once again the meeting has been labelled as crucial. Opinions are split over whether we'll see a third consecutive rate hike, or a pause this month.?

Another rate hike will contribute to a tough stance on rising inflation but that will likely dent the growth prospect for the GDP recovery this year.?A pause will give the economy a boost, but will risk inflation getting out of control and increasing the risk of a wages/prices spiral beginning in earnest.

If that wasn’t enough for them to deal with, the MPC decision will be further complicated by the Chancellor’s Spring Budget on March 23rd, where he will deliver increases to the energy price cap and to National Insurance.?

The market has been pretty volatile, while war rages in Ukraine, and global risk appetite has been dominating trade. We open the new week at the low-end of the recent range against the dollar, just over the 1.30 mark. Against the Euro, we’re nearer to the middle of the recent range, opening around 1.1925.?

Fed rate hike is the main US focus

The Fed will meet to mull over their rate decision this week and 25bps is the bare minimum expected. There are still plenty who favour front-loading the rate hikes and starting with 0.5%, but the conflict in Ukraine will probably drive an element of caution, especially as sanctions have banned imports of Russian oil.?

That ban affects about 8% of the US total, which won’t have a huge effect on its own, but rising oil prices have seen petrol prices ramp up significantly and that has seen inflation forecasts shifted up over 10% in the coming months.

So, although Powell has said he favours a 25bp hike now and more aggressive hikes to come, if needed, this will see inflation continue to rise. Wage inflation rose above 5% in February and that is likely to have risen further this month so a more aggressive hike would help pull this back under control.?

ECB meeting delivers a surprise outcome

The ECB meeting last week had a more hawkish outcome than expected. The tapering of official support will begin sooner than had been expected, but Christine Lagarde would not be drawn on when we’d see the first rate hike. She repeated her determination that scaling back of support will take place gradually.?

Last week, the euro traded in a fairly wide range as global risk appetite ebbed and flowed, but ended up larged unchanged on the week.

EUR/USD saw a high of 1.1121, but fading hopes of a negotiated settlement in Ukraine saw it fall back to close at 1.0910, which is where we open the new week.