Marketmind: How high will BoE go?

12:37 am Thursday, June 22nd, 2023

A look at the day ahead in European and global markets from Ankur Banerjee

The stage is set for the Bank of England on a central bank- heavy day in Europe, with a hike all but certain and the only doubt being whether the BoE will raise interest rates by 25 basis points or by 50 basis points and turn fully hawkish.

After a hotter than anticipated inflation report on Wednesday, markets priced in a nearly 50% chance that the BoE would opt for a half a percentage point hike. Economists, polled by Reuters last week, unanimously expected the BoE to raise interest rates by 25 bps to 4.75%, their highest since 2008.

The policy divergence between BoE and other major central banks as a result of red hot UK inflation versus easing but not fast enough inflation in other parts of the world has provided sterling a lift. The pound was muted in Asian hours but not far from the 14-month peak it touched last week.

With China and Hong Kong closed for a holiday, trading in Asia was a bit subdued, with the MSCI Asia ex-Japan index struggling for direction, while the yen firmed up against the dollar and hovered around the 141 per dollar level.

Futures indicated European stocks were set for a lower open as traders weigh comments from Federal Reserve Chair Jerome Powell that were consistent with his recent hawkish tone.

Powell flagged that a majority of policymakers see two more quarter-point rate increases as likely by the end of the year and he still won’t characterise the Fed’s decision last week to hold interest rates steady as a “pause”.

“We didn’t use the word pause and I wouldn’t use it here,” Powell said.

While his comments failed to surprise, markets are still unconvinced that the Fed will provide two more hikes. Markets are pricing in a 72% chance of a 25 bps hike next month and then no more, according to CME FedWatch tool.

Elsewhere, Turkey’s central bank, under new chief Hafize Gaye Erkan, is expected to raise its policy rate sharply and confirm a policy pivot as the country takes steps toward economic orthodoxy to address soaring inflation.

Swiss National Bank and Norway’s Norges Bank are also due to announce their policy decisions, with a 25 basis point hike widely expected from both central banks.

Key developments that could influence markets on Thursday:

Economic events: Policy rate decision from BoE, Turkey’s central bank, Swiss National Bank and Norway’s Norges Bank

(Reporting by Ankur Banerjee in Singapore; Editing by Muralikumar Anantharaman)