Last week was characterized by monetary policy meetings of many central banks and numerous institutions from emerging markets.
The Federal Reserve has expressed concerns about inflation and has acted accordingly by dropping the adjective “transitory” and doubling the pace of tapering from $15 billion to $30 billion. This should allow the plan to scale back the extent of monetary loosening to be completed in March. Markets expect three rate hikes in 2022 (up from the previous consensus of one) as indicated by the “Dot Plot.”
The ECB has confirmed the end of the PEPP in March, as well as the reviving of the APP purchases at a slower pace than the market anticipated. In fact, in Q2, 40 billion euro will be purchased per month, dropping to 30 billion euro in Q3, and then returning to the standard 20 billion euro by the end of next year. However, by resorting to APP in 2022, the Institute has implicitly ruled out a rate hike next year.
The British pound rose briefly after the Bank of England unexpectedly raised the reference rate by 15 basis points and signaled a “moderately restrictive” monetary policy in the near future. However, given the escalation of contagions in the UK and the resignation of Britain’s chief Brexit negotiator, David Frost, who was replaced by Foreign Minister Liz Truss, the strength of the GBP could be short-lived. On the emerging front, Turkey continued to cut rates, contributing to the lira’s depreciation, which was exacerbated by Erdogan’s remarks. The president reiterated his commitment to cut rates in accordance with Islamic law and causing the Turkish lira to dive. However, a further comment about the intention of the Turkish government to offset losses on FX has brought to a sharp recovery both against the EUR and the USD. In contrast, the Russian and Mexican central banks increased their benchmark rates by 100 basis points and 50 basis points, respectively. However, sales of oil offset purchases of the Russian ruble and Mexican pesos necessitated by the rise in the cost of money.