BoE & ECB are set to raise rates by 0.5%, in line with the Fed – Daily Market Brief, December 15, 2022

The BoE and the ECB are set to follow the Federal Reserve’s footsteps and raise interest rates at a slower pace of 50 basis points. The pound and the euro are falling against the USD.

·         The Fed raised rates by 50 basis points and hinted at more rate hikes to come

·         The Fed terminal rate was revised higher to 5.1%, up from 4.6%

·         ECB could also set out plans for QT

Stocks on Wall Street and the USD closed the session in the red after the US Federal Reserve raised interest rates by 50 basis points as expected but also guided for more-rate hikes next year.

The 50 basis point hike comes after four consecutive rate hikes of 75 basis points and takes the benchmark lending rate to 4.5%, its highest level since 2007, as the US central bank fights against elevated inflation.

The Federal Reserve also indicated that inflation would take longer to lower than initially expected. The dot plot points to a terminal rate of 5.1%, up from the 4.6% forecast in September. In the press conference, Federal Reserve chair Jerome Powell said that the US central bank still has some way to go to rein in inflation. Powell also said the interest rate increase at the next FOMC meeting on February 1st would depend on incoming data. This leaves the door open for another 50-basis point rate hike, or a downshift to a 25-basis point rate hike. Jerome Powell also pushed back against the idea that the Fed would start cutting interest rates next year.

The US dollar and US futures are rebounding in early trade on Thursday. Meanwhile, stocks in Europe are pointing to a weaker start on the open ahead of the ECB and the BoE interest rate decisions.

ECB rate decision

The ECB is expected to slow the pace of interest rate hikes and set up plans to shrink its balance sheets as it continues to fight against inflation. After two rate hikes of 75 basis points, the central bank is expected to raise rates by 50 basis points to take the deposit rate to 2%, a level considered neutral, neither stimulating nor restricting the economy.

The slower pace of rate hikes comes as inflation starts to show signs of cooling in the eurozone, with price growth easing for the first time in 18 months. However, inflation remains in double digits.

ECB President Christine Lagarde is also expected to announce how the ECB intends to approach quantitative tightening, selling off the bonds accumulated across the pandemic. Precise details and timings will come later, most likely at the February meeting.

EUR/USD trades -0.3% at 1.0650 at the time of writing, and the DAX trades -0.6% at 14350.

BoE rate decision

In line with the Federal Reserve and the ECB, the BoE is also expected to slow the pace of rate hikes by 50 basis points after a one-off 75 basis point high in the previous meeting, the largest rate hike in 30 years.

A 50 basis point hike would take the benchmark rate to 3.5% and comes as UK inflation remains elevated at 10.7% YoY in November, just down from the 40-year high of 11.1%. Meanwhile, the UK economy is expected to enter a recession this quarter, with the UK facing the worst growth outlook of any big economy.

There is a potential for a three or four-way split among the nine policymakers. Evidence shows that inflation could have peaked as oil prices fall and GBP rises. However, there are also signs that inflation could continue to rise as strong wage growth pushes up the price of services.

GBP/USD trades -0.3% below 1.24 at the time of writing, and the FTSE is set to open -0.3% lower.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

Sources: Bloomberg, CNBC, Reuters 

Original article provided by Trading Writers

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