Key Week for Central Banks: The Fed, ECB, and BoJ Decide on Their Rates

In addition to the earnings results from major tech companies, the market will be attentive this week to the monetary policy meetings of the three most important central banks in the world: the Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of Japan (BoJ).

While the market does not expect a rate hike during these meetings, it does bet on an increase in December, due to the pressure on prices globally from the war in the Middle East, which shows no signs of ending.

The first stop --- and the most important one, will be the Fed, with the meeting of the body responsible for making the decision, the Federal Open Market Committee (FOMC), scheduled to begin on Tuesday, but with its final verdict known only the following day.

Despite the high inflation figures recorded in September and that several members of the U.S. central bank indicated that additional measures will likely be necessary to control inflation, the market consensus does not expect new hikes this month, which would remain in the range of 3.75%-4.00%.

According to CME Group's FedWatch, only 11% expect an increase in interest rates. However, for the meeting in the last month of the year, the scenario is the opposite: 80% expect an increase on December 9.
The Federal Reserve defines its monetary policy in the face of inflation.

Focus on Fed Dissents

In its report to clients, the Royal Bank of Canada (RBC) noted that the focus of this meeting is likely to be the number of voters within the FOMC who dissent in favor of a rate hike: "This is data that, in our view, will serve as an indicator of the probability of a rate increase in December," they argued.

From their perspective, "two or fewer dissenting votes will likely lead to a reduction in the probability of a hike this year, while three or more dissenting votes in that sense will likely increase the perceived probability of a measure in December."

Additionally, ING Bank recalled that in the last summary of economic projections from the Fed, four members of the FOMC anticipated rate increases totaling 50 basis points by the end of the year, so "it is unlikely that the decision will be unanimous."

They added that Beth Hammack, from the Cleveland Fed; Neel Kashkari from Minneapolis; and Lorie Logan, from Dallas voted in favor of a hike in July, when the rest of the FOMC opted to keep rates unchanged. "The three could dissent again, positioning themselves in favor of an increase," hypothesized analysts from the Dutch bank.

The French Crisis Helps the ECB

On Thursday, it will be the turn of the ECB. Of the three central banks, it was the most likely to experience a rate increase, due to the "hawkish" message given by the head of the institution, Christine Lagarde, after raising rates in September. However, despite inflation showing no signs of slowing down, expectations have diminished thanks to an unexpected factor: France.

The rise in yields on European bonds, due to the French crisis, is already imposing a new restrictive monetary policy orientation, according to ING, which noted that "the bond market has taken on the role of the ECB."

The eurozone economy is particularly sensitive to energy prices.

"In fact, the increase in German bond yields since the September meeting has had, approximately, the same impact on growth and inflation as an additional interest rate hike of 25 basis points. In the case of France, the effect is equivalent to a hike close to 50 basis points," explained the bank's report.

For this reason, ING analysts are confident that the ECB "will delay any upcoming rate hike decision until December", when it will be clearer that high energy costs

Japan Delays Rate Hikes, Relief for Carry Trade

Like the European Central Bank, the Bank of Japan raised interest rates last month, and analysts' consensus expects the monetary authority to keep its monetary policy unchanged in the meeting that its members will hold between Thursday and Friday.

Last week, it was revealed that September inflation reached 2.1%, exceeding the BoJ's 2% target for the first time this year. "Markets continue to expect the BoJ to start raising interest rates in December, so the evolution of Japanese equities is conditioned by corporate profits and global risk appetite," stated Hang Seng Bank in its daily report.
Japan is the epicenter of the most important financial operations in global markets.

Both ING and Oxford Economics also expect the first rate increase to occur in December of this year, although the English think tank does not rule out that this increase could happen in January up to 1.5%. However, they argued that a hike to 1.75% "will be a more delicate decision, given that the monetary policy rate is approaching the 'neutral' level" set by the agency.

Japan's monetary policy is extremely important for global financial markets, as it is the origin of the carry trade between the yen and the dollar, one of the most important operations internationally to achieve liquidity in the capital markets.

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