GBP

After the hawkish comments from the Federal Reserve (Fed) on Wednesday evening at their interest rate and economic policy projections meeting, it was the Bank of England’s turn on Thursday. The BoE voted unanimously to keep interest rates at the historic low of 0.1%, but warned of severe shortages of workers and raw materials were weighing on Britain’s economic recovery from lockdown. However, they predicted that inflation will rise above 4% as household energy bills will increase and put living costs up. This is expected to last through to the middle of next year despite a slowdown in the economy.

Growth prospects also were downgraded by 1% which means it would remain 2.5% below its pre-pandemic level. Although voting against immediate action, the MPC said recent developments had “strengthened the case” for a modest increase in the Bank’s base rate in the next few years.

The pound rose on the international currency markets against most of its major peers amid speculation that the BoE would be forced to raise borrowing costs earlier than first thought to deal with soaring inflation. Reflecting growing unease over inflationary pressures, Dave Ramsden, the Bank’s Deputy Governor for Markets and Banking, joined external MPC member Michael Saunders in voting to cut short the limit on the Central Bank’s £895bn quantitative easing programme by £35bn.

City analysts said financial markets were pricing in the first rise in interest rates since the onset of Covid-19 would take place in March next year, two years after the central bank sank borrowing costs to record lows as the pandemic spread to Europe. However, Andrew Bailey said the Central Bank still expected current elevated global supply cost pressures would prove transitory. Key to the Bank’s decision making will also be the impact of the closure of the furlough scheme next week, he said. Although most bets are that the BoE will look to normalise monetary policy for early next year.

EUR

The euro came under pressure again yesterday after data revealed that rising prices were dampening business activity in the eurozone. The German Manufacturing PMI showed ongoing supply disruption to manufacturing production, while the service sector also lost momentum following its recent strong rebound.

Rates of inflation of both input prices and output charges retreated slightly further from their recent peaks, though they still remained among the quickest on record, reflecting continued pressure from energy, material and transportation costs. Concerns regarding supply chains and inflationary pressures in turn weighed on business confidence.

The ECB President Christine Lagarde this morning said in an interview with CNBC that many of the drivers of the recent spike in eurozone inflation are temporary and are due to fade in the next year. She went on to blame much of the rise on supply disruptions and that inflation should stabilise next year. She again sought to differentiate between the ECB scaling back its bond buying program this month and the Fed which said it expects to start tapering its own bond buying scheme soon. This indicates that ECB are some way behind both the Fed and the BoE in normalising its monetary policy.

Key announcements

9:00 – German IFO business climate
15:00 – Fed Chair Powell speaks