The hawkish stance from BoE, ECB, and Fed as inflation pressures mount
Head of Investment Research
Pound Sterling and Euro bounce off yearly lows against U.S. dollar after the Bank of England and European Central Bank adopted more hawkish stances than markets had expected on Thursday, despite the emergence of highly mutated Omicron covid variant and uncertainty over its near-term economic growth impact.
The BoE and ECB monetary decisions came after Wednesday, when the Federal Reserve said it would accelerate a tapering of its bond-buying stimulus to end the program in March, setting up three quarter-point rate increases in 2022.
The different paths taken by major central banks underline deep uncertainties about how the fast-spreading omicron variant will hit economies and about how much each should do to fight surging inflation, which is hitting hard in the United States and Britain, but less so in Europe.
Bank of England’s first-rate hike after pandemic:
UK-based FTSE 100 index rose 1% and Pound Sterling jumped to as high as $1,337 yesterday, its highest since the end of November, as investors reacted positively to the surprising decision of the Bank of England- BoE to hike its key interest rate by 0,15% to 0,25% as inflation pressures mount.
GBP/USD pair, Daily chart
As a result, BoE became the first G7 major central bank to raise interest rates since the beginning of the Covid-19 pandemic in March 2020, driven by a strong labour market recovery and the need to return inflation towards its 2% target from a 10-year high of 5,1% in November.
BoE expects UK inflation to remain at around 5% through most of the winter period, peaking at around 6% in April 2022 on elevating consumer prices.
European Central Bank cuts pandemic bond-buying program:
Despite the surprised BoE rate hike and hawkish stance from U.S. Federal Reserve, European Central Bank kept a less hawkish but flexible tone, leaving its benchmark refinancing rate unchanged at 0% on Thursday, keeping the rate on its marginal lending facility at 0.25%, while the rate on its deposit facility was kept unchanged at -0.5%, in line with market expectations.
Hence, ECB said that it will slow down its pandemic-era 1.85 trillion euros ($2.19 trillion) Pandemic Emergency Purchase Programme bond-buying program from April and stay accommodative through 2022 and beyond.
EUR/USD pair, Weekly chart
The common currency bounced off 1,5-year low of $1,118 to near $1,137 yesterday, but far below its 2021-high of $1,23 amid the economic weakness in the Eurozone, the outbreak of Delta variant, and the strengthen of the U.S. dollar due to hawkish Federal Reserve.
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