Central Banks Recap: BoE, CBRT and Norges

 

 
Today’s central bank meetings provided a few surprises. Let’s recap those and consider what the impact on the currency markets might be going forward.
 
BoE turns more hawkish
 
There were no surprises in as far as the actual policy inaction was concerned from the Bank of England. But the pound rallied as the devil was in the detail of the policy statement. What seemed to cause a bit of a surprise was the BoE’s assessment that the case for modest tightening of monetary policy appears to have strengthened. Additionally, the BoE’s acknowledgment of surging inflation, which it thinks will top 4% in Q4, and the fact that 2 instead of 1 policy makers voting to cut QE were further hawkish signals. Dave Ramsden joined Michael Saunders in calling for stock of bond purchases to be reduced from £875 billion to £840 billion. The BoE added that all members “agreed that any future initial tightening of monetary policy should be implemented by an increase in Bank Rate, even if that tightening became appropriate before the end of the existing UK government bond asset purchase programme.”

I think the BoE’s sight hawkish tilt will be bullish for the pound against the likes of CHF and JPY, currencies where the central bank is expected to remain dovish for a very long time. Against the USD, I am not too sure given the Fed’s own hawkish-leaning policy statement and conference yesterday.
 
Norges Bank hikes – and more to follow

True to its word, the Norwegian central bank hiked rates by 25 basis points, thus becoming the first central bank among the developed economies to raise rates since the start of the pandemic.  Given the fact that oil prices remain elevated, inflationary pressures strong across the globe, and with Norway reaching pre-crisis level of economic growth, more hikes are expected in December and at least two more next year, with March looking quite likely. This should keep the NOK fundamentally supported on the yield differential basis.
 
 
CBRT cuts in a surprise move
 
The Turkish Lira slumped to a new record low against the US dollar as traders were surprised by the CBRT’s decision to cut interest rates. The Turkish central bank slashed rates to 18% when no change was expected from 19% previously. Although it acknowledged that macro indicators show domestic economic activity remains strong in the third quarter, thanks in large part to the help of robust external demand with tourism re-opening amid worldwide speeding up of vaccination rollout, the central bank reckons inflation will fall back. That’s why the CBRT reduced rates. But as the lira falls to fresh lows, inflation remains higher, and given the increased risks to the economic outlook, the CBRT’s hands remain tied. I would be surprised if we see further rate cuts until domestic and global inflationary pressures actually start to fall back. Still, today’s rate cut could see the TRY weaken further and we may even see the EUR/TRY reaching a new record high as a result:
 
 Source: ThinkMarkets and TradingView.com