There is a high probability that both the Federal Reserve and the Bank of England will increase their borrowing rates by 75 basis points this week as both central banks continue to scuffle with continuous high inflation.
While both announcements will be closely watched, the post-decision rhetoric will need to be closely analyzed for any indications of the path of rate hikes going forward.
Using current market pricing, it is a near 50/50 call whether the Fed hikes by 50bps or 75bps at the December meeting, and it is this future pricing needs to be followed. The recent risk-on move has partly been driven by a growing feeling in the market that the Fed may pare back on the speed and size of future rate hikes going into next year to see if the economy can withstand sharply higher rates.
The Bank of England will also hike sharply this week as there is a 98% chance of a 75-basis point increase and will look to continue hiking rates in the subsequent months, although the size of each hike is still debatable.
New PM Rishi Sunak and Chancellor Jeremy Hunt have stabilized the British Pound over the last couple of weeks, bringing borrowing costs down.
The UK will also announce its autumn budget on November 17, and the fiscal implications of this will also shape the BoE’s monetary policy decisions for the rest of this year and next.