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It’s a bumper central bank bonanza this week. Policy outlooks and rate statements come thick and fast from Tuesday onwards. First up is the FOMC as the Fed looks to tighten tapering. The Bank of England follows. Is a rate hike coming – or as Omicron triggered panic in the BoE’s ranks? Also watch for the European Central Bank. It might be shunning long-term decision making at this week’s meeting. 

Fed to unwrap faster tapering? 

A Christmas taper may be on the way from the Fed at this week’s FOMC meeting. 

Chair Jerome Powell made a series of comments at the end of November implying that the FOMC could wrap up its bond-buying programme earlier than expected. 

A strong US economy, a tight labour market and ever-present high inflation, expected to last into mid-2022, are all factors that may force the FOMC’s hand. 

“We are actually at our next meeting in a couple of weeks going to have a discussion about accelerating that taper by a few months,” Powel told the Senate Banking Committee on Tuesday, November 30th 

“Since the last meeting, we’ve seen basically elevated inflation pressures, we’ve seen very strong labour market data without any improvement in labour supply, we’ve seen strong spending data too.” 

Inflation is sailing well clear of the Fed’s 2% target. CPI in October, the most up-to-date numbers available at the time of writing, hit 6.2%. High consumer prices are expected to stay until halfway through next year at the earliest. Transitory? Better not mention that word around Powell. It’s been retired, you know. 

Hot inflation is a cause for concern for some in the FOMC. Its November meeting minutes said: “Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives.” 

November’s nonfarm payrolls struck out: 210,000 jobs were added to the US economy last month against 550,000 expected. However, job openings have topped 11m and the labour market itself remains at the tightest since at least the before the great financial crisis, whilst unemployment is hovering around the lowest level since 1969. 

Tapering is already underway, but as pointed out, current economic conditions may necessitate haste from the FOMC. Don’t be surprised if bond-buying acceleration is the Fed’s early Christmas present this December. 

Omicron pressures put brakes on Bank of England rate hike 

There were rumours bubbling under the surface that the Bank of England’s Monetary Policy Committee may have been close to raising rates this month. With the emergence of the Omicron COVID-19 variant, that looks a bit unlikely now. 

November’s MPC meeting minutes showed a 7-2 voting split in favour of keeping rates grounded. When pressed regarding about the timing of a rate hike, Governor Bailey said, “from now onwards”, in a post-meeting statement. 

Bailey also told the BBC: “We think there will be some need to increase interest rates to bring inflation sustainably back to target. And we will be ready to do that.” 

Deputy Governor Ben Broadbent has warned inflation will “comfortably exceed” 5% by mid-Spring 2022. Higher energy bills are expected to push inflation higher. It is already over double the BoE’s 2% inflation target. 

But the Omicron variant is also throwing up different possibilities. Some previously hawkish voices want to see more data on the new COVID strain’s potential financial impact before increasing rates. 

“At present, given the new Omicron COVID variant has only been detected quite recently, there could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy,” BoE policymaker Michael Saunders said in a speech last week. 

According to Reuters, markets had priced in a 33% chance of a hike following Saunders’ online speech, down from 75%. This is quite important, as Saunders was one of two MPC members to vote for an immediate rate hike in November. 

The burden of proof, however, has fallen in hikers’ favour – at least, that’s what Bank of England Chief Economist Huw Pill believes. However, increasing rates, even up to 0.25%, will not be the miracle cure some observers are hoping for, Pill says. 

“There’s no quick fix, and that lack of a quick fix means some patience will be required,” Pill told the conference hosted by the Economics Observatory and the Festival of Economics in late November. 

We’ve seen in studies that Omicron is not as deadly as first feared, but it appears it has been enough to inject caution into the BoE’s hawks. A rate hike is likely coming, but possibly not in December. Early 2022 would be the potential best guess. 

The European Central Bank feels the Omicron weight too 

Omicron may also be piling on the pressure on the European Central Bank. 

Reuters reports that a growing number of economic policymakers across the EU are mulling over a delay over changes to part of the ECB’s €1.85 trillion stimulus programme. The new COVID strain, alongside higher consumer prices, have caused some ECB council members to push the bond-buying wrap up back to February. 

It’s expected that when the ECB’s Governing Council meets on the 16th that they would decide the fate of its flagship bond-buying programme. Initial reports suggest the Council wants it to conclude in March. 

However, Omicron turning up on the scene, and prompting fresh lockdowns in Austria, Germany, and The Netherlands, has caused consternation. Avoiding any long-term commitments might be a more likely outcome of this week’s ECB meeting. That should give enough time to gauge Omicron’s true impact in both economic and societal terms. 

“There are ways to give clarity without making long-term commitments and I would err on the side of not making (a) very long-term commitment because there is too much uncertainty,” ECB President Christine Lagarde said in an interview at the Reuters Next conference earlier this month. 

“But equally, we need to very clearly indicate that we stand ready (to act), in both directions.”  

Looking at rate hikes, don’t expect one in December, or even 2022 for that matter. The earliest one could arrive, based on current high inflation staying throughout next year, is 2023. 

“I cannot rule out an interest rate hike in 2023, if inflation continues to be higher than our base case scenario in 2022”, the head of the Dutch central bank told newspaper het Financieele Dagblad. “But we still consider the elevated inflation to be largely a temporary phenomenon.” 

Temporary but not transitory? 

Major economic data 

Date  Time (GMT)  Asset  Event 
Tue 14-Dec  1:30pm  USD  PPI m/m 
  1:30pm  USD  Core PPI m/m 
       
Wed 15-Dec  2:00am  CNY  Retail Sales y/y 
  7:00am  GBP  CPI y/y 
  1:30pm  CAD  CPI m/m 
  1:30pm  CAD  Common CPI y/y 
  1:30pm  CAD  Median CPI y/y 
  1:30pm  CAD  Trimmed CPI y/y 
  1:30pm  USD  Core Retail Sales m/m 
  1:30pm  USD  Retail Sales m/m 
  1:30pm  USD  Empire State Manufacturing Index 
  3:30pm  OIL  Crude Oil Inventories 
  7:00pm  USD  FOMC Economic Projections 
  7:00pm  USD  FOMC Statement 
  7:00pm  USD  Federal Funds Rate 
  7:30pm  USD  FOMC Press Conference 
  9:45pm  NZD  GDP q/q 
       
Thu 16-Dec  12:30am  AUD  Employment Change 
  12:30am  AUD  Unemployment Rate 
  7:00am  GBP  Retail Sales m/m 
  8:15am  EUR  French Flash Services PMI 
  8:30am  CHF  SNB Monetary Policy Assessment 
  8:30am  CHF  SNB Policy Rate 
  8:30am  EUR  German Flash Manufacturing PMI 
  8:30am  EUR  German Flash Services PMI 
  9:00am  CHF  SNB Press Conference 
  9:00am  EUR  Flash Manufacturing PMI 
  9:00am  EUR  Flash Services PMI 
  9:30am  GBP  Flash Manufacturing PMI 
  9:30am  GBP  Flash Services PMI 
  12:00pm  GBP  Asset Purchase Facility 
  12:00pm  GBP  MPC Asset Purchase Facility Votes 
  12:00pm  GBP  MPC Official Bank Rate Votes 
  12:00pm  GBP  Monetary Policy Summary 
  12:00pm  GBP  Official Bank Rate 
  12:45pm  EUR  Main Refinancing Rate 
  12:45pm  EUR  Monetary Policy Statement 
  1:30pm  EUR  ECB Press Conference 
  1:30pm  USD  Philly Fed Manufacturing Index 
  1:30pm  USD  Unemployment Claims 
  2:15pm  USD  Industrial Production m/m 
  2:45pm  USD  Flash Manufacturing PMI 
  2:45pm  USD  Flash Services PMI 
       
Fri 17-Dec  Tentative  JPY  Monetary Policy Statement 
  Tentative  JPY  BOJ Press Conference 
  9:00am  EUR  German ifo Business Climate 

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