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Bank of England takes the spotlight after Fed and European Central Bank action

This week sees the BoE’s (Bank of England) Monetary Policy Committee in the spotlight as far as markets are concerned. There is broad consensus that the BoE will hike interest rates a further 25 basis-points to 4.5%, prompted by the ongoing overshoot of headline and core inflation rates versus the target.

However, last week saw the Federal Reserve and European Central Bank also announce 25 basis-point hikes, and introduce a significant note of caution about the direction of monetary policy for the future. The macroeconomic hurdle for more rate increases from here is a lot higher, and the effect of higher interest rates and quantitative tightening are nowhere close to being fully felt.

This upcoming rate decision from the BoE should be the last tightening, and there is an argument to suggest that it isn’t even necessary. What will be as important as the BoE’s decision is its assessment of current economic and market conditions, contained within the Monetary Policy Report. Will this assessment revise GDP (Gross Domestic Product) expectations upwards? Will there be any reference to the drop in money supply? How does the BoE view current trends in the UK labour market? Finally, after the USD and EUR took a hit post the interest rate decisions from each of their central banks, is it the GBP’s turn this week? 

Could the US Consumer Price Index figures cause the USD further problems?

There are a few important releases due from the various macroeconomic jurisdictions this week, but none more important than the April US consumer price inflation figures. These are released on Wednesday afternoon and are expected to record no further improvement in the headline rate of CPI (Consumer Price Index) inflation, but a small pull back in core inflation rates. I would suspect there could be a surprise in these figures, which if it is to the downside, would increase market confidence that the Federal Reserve is done with its hiking programme. That could undermine the US dollar once again, albeit only short-term in my view, and probably more so against the GBP than the EUR, which is already dealing with its own problems.

Later in the week, post the BoE decision, provisional Q1 GDP figures for the UK are released. Are these going to record some latent strength in the UK economy, or will services output have underperformed, producing a stagnation in activity in Q1 or worse?

There are risks to the downside as far as the monthly GDP figures are concerned as well, in my view, which could intensify any sell-off in the GBP towards the end of the week against the USD and EUR. 

Surprise hikes from Reserve Bank of Australia and National Bank of Malaysia, but will it really help in the inflation fight?

Last week saw the RBA (Reserve Bank of Australia) and the BNM (National Bank of Malaysia) both raise interest rates when they weren’t expected to. This was likely a parting shot to above target inflation rates, albeit it will likely have limited direct effect on bringing inflation back to target in either economy, and is more symbolic of where both central banks perceive the economic risks to be. 

This week is likely to be far less interesting, with no change expected from the Polish, Romanian, Peruvian or Colombian central banks. I think the message is fairly clear in the global economy that the risks are moving away from inflation, which was itself driven by supply side and geopolitical problems. However, if there are growing risks of recession and a squeeze on credit conditions, how will emerging market currencies fare?

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