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| Federal Reserve and Bank of England's Key Rate Decisions and UK CPI Release Amid Banking Sector Uncertainty |
This week will see a host of important events, including key rate decisions from the Federal Reserve and Bank of England, as well as the release of UK CPI data. The Federal Reserve is expected to hike rates by 25 basis points, however, recent events around the collapse of Silicon Valley Bank have led to concerns about the effect of rising rates on the banking sector and wider economy. The Bank of England is also facing pressure to raise rates, however, recent events across the banking sector have led to market estimates of the terminal rate falling from 4.8% to 4.25%. The UK CPI is expected to fall slightly, but still remains significantly above the Bank of England's 2% target.
The recent events around Silicon Valley Bank have caused some to suggest that the Federal Reserve may pause or even cut rates this week, however, this seems unlikely. By cutting rates, the Fed would be signaling a wider problem, which could prompt the opposite effect by spooking markets further. A hike of 25 basis points seems the most probable outcome, with the bigger risk being that Powell overcompensates after the market's negative reaction to his testimony to US lawmakers. How Powell manages market expectations this week will be as equally important as the decision itself.
UK consumers have been offered some respite from falling energy prices in recent months, however, the onset of spring and warmer weather could also offer some relief. The last set of CPI numbers showed headline inflation falling to 10.1%, while core prices fell back from 6.3% to 5.8%. Despite this, food prices have continued to rise sharply, and with wage inflation also rising, inflation is likely to remain sticky. Expectations are for headline inflation to fall to 9.8% and core prices to 5.7%.
The Bank of England is also facing pressure to raise rates, however, recent events across the banking sector have led to concerns about the stability of the banking sector. Recent comments from Governor Andrew Bailey have helped to give the MPC some wriggle room this week, as nothing has been decided when it comes to further hikes in rates. Bailey did go on to say that more rate rises would likely be needed, however, the MPC remains split with Tenreyro and Dhingra both opposed to further rate hikes even with headline CPI still above 10% and core prices above the Bank of England's 2% target.
In conclusion, this week will see a number of key events and decisions from the Federal Reserve, Bank of England, and the UK CPI. The recent events around Silicon Valley Bank and concerns about the stability of the banking sector have added further uncertainty to these already significant events. The decisions made this week will have far-reaching implications for the wider economy and will be closely watched by investors and analysts alike.
