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BoE Surprised Markets With Shock Decision, ECB Ends Pandemic Stimulus Program & Gold Prices Rebound

Bank of England makes shock rate decision

Super Thursday did not disappoint, as the Bank of England surprised markets by opting to hike interest rates.

The BoE voted unanimously to increase rates to 0.25%, and as such became the first major central bank to raise rates, since the beginning of the pandemic last year.

Thursday’s decision came as the bank’s 2% inflation rate target no longer looked realistic, with consumer prices rising to a 10-year high of 5.1% in November.

💡 What are the Bank’s expectations.
Bank staff expect inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022.

BoE governor Andrew Bailey stated that, “We’re concerned about inflation in the medium term. And we’re seeing things now that can threaten that. So that’s why we have to act”.

GBPUSD rose to a 3-week high of 1.3374 on the news, with London’s FTSE 100 closing 1.25% higher.

DAX 30 higher, as ECB ends pandemic stimulus program

The European central bank also held its latest policy meeting on Thursday, however opted to keep interest rates unchanged.

Despite this, the Bank did move to begin cutting its bond buying programme, where it originally allocated €1.85 trillion in response to the pandemic.

The so-called PEPP or Pandemic Emergency Purchase Program will be cut starting next month, as the scheme approaches its completion date of March 2022.

💡Tension in EU
The ECB raised its inflation projections across the board and now sees it at 3.2% next year, well above target, before a drop to 1.8% in both 2023 and 2024.

Some conservatives also objected to the ECB’s decision not to put an end-date on bond buys, which will continue “as long as necessary” after their pace falls from 40 billion euros a month in the second quarter to 20 billion euros by October.

In a statement following the move, the bank stated, “The Governing Council judges that the progress on economic recovery and towards its medium-term inflation target permits a step-by-step reduction in the pace of its asset purchases over the coming quarters”.

The bank continues to maintain its inflation outlook, adding “But monetary accommodation is still needed for inflation to stabilize at the 2% inflation target over the medium term”.

Germany’s DAX 30 was up 1.03% on the day.

Gold rebounds a day after Fed policy meeting

Gold prices were up on Thursday, following the latest Federal Reserve meeting the day prior.

On Wednesday, the Fed opted to keep rates unchanged to end the year, however signaled that several hikes could be on the horizon in 2022.

Similar to the ECB, the Fed will commence tapering its asset purchasing program at a faster pace than initially planned.

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This now gives way to a completion of the project in Q1 of 2022, when it will then look at 2-3 rate hikes for the year.

Speaking after the announcement, Chair Powell stated that, “Economic activity is on track to expand at a robust pace this year, reflecting progress on vaccinations and the reopening of the economy”. 

XAUUSD rose by over $25 today, hitting an intraday high of $1,798.

“It’s not what we do once in a while that shapes our lives. It’s what we do consistently.”

– Tony Robbins

Eliman Dambell

Senior Market Analyst

 

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