The main protagonists in the central banking world, the Federal Reserve, Bank of England and ECB (European Central Bank) all announce decisions on monetary policy this week. The decisions themselves are quite straightforward, at least in my view, with none of the central banks set to move interest rates up or down. 

However, the financial markets will be trying to gauge the mood music amongst these monetary policy setting bodies, so what is said in the aftermath of the decisions will be more interesting than what each central bank does. For the Federal Reserve, the attention is likely to centre around the dot plots, which is the Fed’s pictorial depiction of the interest rate expectations of each Fed member, as well as suggesting what the median of these expectations. 

Although this path is not necessarily how things will pan out, given that the interest rate outlook will need to adjust to any unforeseen domestic and external shocks, it provides the market with some guidance of the likely path of interest rates. For the Bank of England, the vote of the MPC (Monetary Policy Committee) will prove important. Will there still be three holdouts voting for higher interest rates at the December meeting, or will the dissent have faded? Will any of the ‘doves’ on the committee argue for lower interest rates, given the weakness in activity? 

Finally, a lot of attention will be focused on President Christine Lagarde’s press conference post the December ECB meeting. Will the ECB recognise the weakness of the economy, the rapid downtrend in producer prices and a generally more disinflationary environment for consumer prices removes a central pillar of the argument for restrictive monetary policy, in my view.

For the FX markets then there are risks for the GBP and EUR (to the downside) whereas the Federal Reserve decision is more likely to be unsurprising, and the dot plots aren’t likely to change that much from the September figures. Can the pound hold on to recent gains against the USD and EUR, or is there trouble ahead? I certainly think that if there is a surprise from the MPC vote, then markets, in thinning liquidity, might overcompensate on this news. GBPUSD could give back more of recent gains and move towards $1.24, and GBPEUR could head lower, towards €1.1570. Not big moves in of themselves, but risking larger moves in holiday markets if a large, unexpected transaction is executed.

Furthermore, are markets too complacent about the economic outlook for 2024? The most recent expectations for the UK and Euroland economies are that they will both struggle to see growth of more than 1% in 2024, and the US is not set to materially outperform. The risks to the global economy from other geopolitical problems, credit issues and the overhang of monetary tightening are not adequately priced for, in my view, and some further warnings signs might be unearthed in data releases this week and next. The financial markets have seen significant falls in energy prices lately. Could that increase the disinflationary risks to the global production and distribution chains? What could lower interest rates in the major economies mean for interest rates elsewhere, and what about the potential for a weaker Chinese renminbi and its effect on global pricing?

Last week saw nothing to surprise the financial markets in terms of the headline decisions from the Reserve Bank of Australia, the National Bank of Poland, the Bank of Canada or the Reserve Bank of India. Interest rates were left on hold, as more time will be taken to assess the domestic and imported inflation risks.

For this week, there are a large number of important decisions due from central banks outside of the major economies. The week kicks off with the Brazilian central bank on Wednesday expected to reduce interest rates by 50 basis points. The Philippines central bank is expected to leave interest rates on hold early on Thursday, a decision expected to be repeated by the Swiss National Bank and Norges Bank later on that day, ahead of the Bank of England and ECB decisions. Post those, attention will switch to Banxico (Mexico) and the central bank of Peru, the former expected to hold interest rates whilst the latter is forecast to cut by 25 basis points. 

The final decision is that of the Russian central bank, which is predicted to raise interest rates by 1 percentage point to the highest rate since Q2 last year. A steady upward creep in inflation in Russia and the ongoing bite of sanctions continues to cause problems in the economy. One other area of interest in these central bank meetings is whether the strength of currencies such as the Swiss Franc and Mexican Peso is causing the respective central bank a headache?