By Craig Erlam
The Bank of England used its monetary policy report hearing to once more push back against market expectations on rate cuts next year.
A lot of the comments echoed similar sentiments expressed recently by the central bank regarding the job not being done, risks being to the upside for various reasons, and the need to leave rates for an extended period.
However, some policymakers went one further, suggesting rates may need to rise further.
Time will tell how realistic the prospect of another rate hike is, considering inflation recently fell faster than the BoE forecasts anticipated. But it’s clear that markets pricing it at near zero with a cut in the second quarter has irked some on the committee.
Not that Tuesday’s comments have changed much, with markets pricing only a 6% chance of another hike this cycle and roughly a 55% chance of a cut by June.
It hasn’t been the best year for market interest rate expectations and there’s every chance they’re too hopeful once more.
Familiar message likely from FOMC
It will be interesting to see whether we get a similar level of pushback from the FOMC minutes.
While these comments are somewhat dated at this point and the data since has looked more promising, sentiment on the committee going into year-end is important, with the central bank’s reputation somewhat bruised by its inaction at the start of this tightening process.
Policymakers desperately don’t want to underestimate the threat of inflation again now, just as pressures appear to be easing. The minutes will simply re-emphasise the need to stay higher for longer, with slightly less talk of further rate hikes.
Oil bouncing back
Oil prices have rebounded a little over the last couple of sessions, with traders potentially having one eye on the OPEC+ meeting this weekend.
The group hasn’t been shy to cut production in the past when prices have been falling, despite the public backlash that inevitably follows, and traders will be wondering whether they’ll be tempted again.
Output restrictions from Saudi Arabia and Russia run to the end of the year so this will be a particular focus this weekend.
Brent at $80 a barrel probably isn’t a major cause for concern for the producers but the direction of travel over the last month may be. And an increase from January could push prices even lower.
Gold eyes $2,000
Ahead of the Fed minutes, gold was trading very close to $2,000 which could be another very interesting tussle.
It failed around there on a number of occasions last month before falling back toward $1,930 but weaker jobs data and a better inflation report have propelled it back to the major psychological barrier.
Should it overcome it, significantly unlike in October, it could be viewed as a very bullish signal.
Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.