Fed puts asset purchases aside, the decision by the Bank of England on a knife-edge (Daily analysis 02.11.2021)

This week, markets' attention will focus on central banks' reaction to rising inflationary risks. First and foremost, tomorrow evening, the Federal Reserve will announce the gradual phasing out of asset purchases, which have been conducted at a rate of 120 billion USD per month in response to the pandemic.

Investors are well prepared for such a move and will be looking for clues regarding how the central bank will behave in the back of next year after the pandemic of asset purchases is shelved. Two rate hikes are already priced in for next year, which greatly narrows the dollar's potential. Also important will be Friday's labour market report, which will answer questions about whether the US economy's third-quarter slowdown is likely to continue in the months ahead and whether wage growth threatening to bring inflation out of control is continuing.

Decisions more or less obvious

The Bank of England will decide on the money cost level on Thursday. The growing belief that sharp rate rises are getting closer has been water on the pound's mill. The market is strongly divided over whether the start of normalisation will take place as early as November. With an ambitious, upbeat valuation assuming rates rise from 0.1 to 1.25% on a one-year horizon, a pause before normalisation would be a blow to the UK currency's quotations. As with the dollar, we believe that the pricing of rates will be an opportunity rather than a burden for the pound.

There is less controversy about the actions of other central bankers who will decide on policy the day after tomorrow. The Czech monetary authorities will raise interest rates again (for the fourth meeting in a row). The Czech koruna is the most stable currency in the region, and this status should be maintained towards the end of the year. In turn, Norges Bank was the first of the major central banks to raise rates in October. This provided significant support to the Norwegian krone, one of the beneficiaries of the boom in commodity markets. We should expect a pause this time, which does not change the fact that the Norwegian currency has its five minutes and is seen as the most attractive among the G-10.

The National Bank of Poland on the to move again

The NBP's meeting will be particularly eventful. In October, consumer prices were 6.8% higher than a year earlier. Such strong inflation has not been recorded since 2001. The main perpetrators are energy prices, but the truth is that more than three-quarters of the categories are rising above the 2.5% inflation target. The picture of price tendencies in the Polish economy is completed because prices have risen again very strongly (this time by as much as 1%) compared to the previous month.

The previous price jump played an important role in convincing most central bankers that a delayed increase in the cost of money is needed to prevent strong price pressures from becoming permanent and inflation expectations from exploding. Another rise in prices could lead to the conclusion that 0.5% interest rates in the face of almost 7% inflation will prove to be too weak a weapon. Secondly, when making tomorrow's decision, the Council will have the new NBP inflation projection at its disposal. It will inevitably indicate that a return of inflation to the target is too distant a prospect to have the comfort of passive and patient observation of the development of events. Therefore, another hike, even by 50 basis points, appears to be a real scenario.