On February 3, the European Central Bank and the Bank of England will announce decisions on interest rates and quantitative easing programs. Investors can also look forward to learning whether the two banks are planning a cycle of hikes in 2022.
The market consensus is that the Bank of England will raise its key interest rate by 25 basis points today, to 0.5 percent. This will likely be the second consecutive rate hike decision, which may be aimed at fighting rising inflation. Recall that UK interest rates rose 15 basis points in December.
Rates higher than before the pandemic?
If today the Bank of England meets investors' expectations, we could be facing the first series of interest rate hikes since 2004. It could push the cost of borrowing in the British Isles to its highest level in 2 years.
However, interest rates are likely to remain below the 0.75 percent level that was in place before the coronavirus pandemic. Only the next few months could change that. The market consensus is for the UK interest rate to rise to 1-1.25 percent in 2022.
The UK's annual inflation rate has risen to its highest level in 30 years. In December, the Bank of England forecast that inflation would remain around 5 percent for most of the winter period and peak at approx. 6 percent in April 2022, before falling back in the second half of next year.
The central bank may signal today that it will begin to back away from loose monetary policy and additional asset purchase activity.
ECB: no hike, but an option to announce one
Today we will also hear the European Central Bank's decision on interest rates. The market assumes that the first rate hike by 10 bps may take place only in July.
Inflation in the Eurozone has already risen above 5 percent, which may trigger an earlier signal action by the ECB to show that the bank is responding to price increases in the economy. However, forecasts are that inflation could fall to 2 percent by the end of 2022, which would not require drastic action from the ECB.
Will the euro lose out due to ECB policy?
In the mix - the Federal Reserve, the Bank of England and the ECB - only two banks seem to be in a race over who will raise interest rates in 2022 and how fast. The ECB is taking a different path, and this differentiated approach could also affect the US dollar, British pound or euro. The common European currency could lose against GBP and USD.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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