Central bank decisions and what to know for the week ahead

This week is a big one for central banks, with the Federal Reserve (Fed), the Bank of England (BoE), and the Bank of Japan (BoJ) all set to announce interest rate decisions.

After keeping borrowing costs at a two-decade high for over a year, the Fed began lowering rates in September, prompted by concerns that a cooling US labor market could be approaching a critical threshold. That half-percentage-point trim was followed by a smaller quarter-point cut in November. And on Wednesday, the central bank is widely expected to make another quarter-point snip, with inflation still running faster than it’d like.

What happens next year with interest rates is quite uncertain: the president-elect’s plans for steep new tariffs could trigger another sharp spike in inflation, which could prompt the Fed to pause or even reverse its rate cuts. But at least traders will get some clues about the Fed’s current thinking on Wednesday when it releases its closely watched “dot plot”, which shows where its members see interest rates moving in the medium term.

When it comes to the BoE and BoJ, investors widely expect both to hold borrowing costs steady on Thursday.

Britain’s central bank has already delivered two quarter-point cuts this year. However, at its most recent meeting in November, the Bank said that the government’s new budget will likely increase inflation and economic growth. That’s made the central bank cautious about cutting rates too aggressively: policymakers have said any further reductions will have to wait until next year.

In contrast, the BoJ has been the only major central bank that’s been raising interest rates, having done so twice this year. The latest, a surprise hike, sent shockwaves through financial markets. So the Bank is likely in no rush to rock that boat again…

On the calendar 

Monday: China industrial production and retail sales (November), eurozone PMIs (December), UK PMIs (December), US PMIs (December).

Tuesday: China foreign direct investment (November), UK labor market report (October), US retail sales (November), US industrial production (November).

Wednesday: Japan trade balance (November), UK inflation (November), Fed interest rate announcement. Earnings: Micron Technology.

Thursday: BoJ interest rate announcement, BoE interest rate announcement. Earnings: FedEx, Nike, Accenture.

Friday: Japan inflation (November), China one-year loan prime rate announcement, UK retail sales (November), US personal income and outlays (November), eurozone consumer confidence (December).

What you might’ve missed last week

US

• US inflation sped up, as expected.

Europe

• The European Central Bank cut interest rates for the fourth time.

Asia

• Chinese inflation decelerated, unexpectedly.
• Chinese authorities adopted a more stimulative, “moderately loose” policy stance.

UK

• Sterling reached its strongest level against the euro since March 2022, as the Bank of England may not cut interest rates as aggressively as its neighbor.
• UK stocks’ cheap valuations triggered buying as November saw the first monthly inflow in five years.
• UK economic output unexpectedly shrank by 0.1% in October, marking the second consecutive month of negative growth.
• Bank shares jumped after UK courts permitted lenders to challenge an earlier ruling on car loan financing.
• Recruiters’ shares fell on a warning from specialist recruiter SThree that increased concerns about a hiring slowdown.
• Ashtead announced plans to move its listing to New York, the latest firm to abandon a London listing.
• The UK housing market gathered pace in November despite the cloudy outlook.

Why it matters

US consumer prices increased by 2.7% last month from a year ago – in line with economist expectations but higher than October’s 2.6%. Core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, was unchanged at 3.3%. Overall, the in-line figures are unlikely to change the Fed’s near-term plans for interest rate cuts.

The European Central Bank cut borrowing costs for the fourth time this year, taking its key interest rate to 3%, from 3.25%. The Bank also warned that the eurozone economy would grow by just 1.1% next year, down from its previous estimate of 1.3%. Reading the tea leaves, traders now expect the ECB to deliver five more cuts by September, leaving the rate at just 1.75%.

Annual inflation in China unexpectedly declined to a five-month low of 0.2% in November, despite a huge new stimulus package that aimed to get customers spending again. On a month-over-month basis, consumer prices worryingly dropped by 0.6% in November. What’s more, producer prices, which reflect what factories charge wholesalers for products, fell for the 26th consecutive month, declining by 2.5% in November from a year ago. The underwhelming data did little to ease investor concerns about the risk of deflation in the world’s second-largest economy.

Keen to avoid deflation risk, Chinese authorities announced last week that they’re changing their stance on monetary policy from “prudent” to “moderately loose”. The shift suggests that the central bank will be more willing to aggressively trim interest rates and slash the amount of money that banks are required to hold in reserve. China hasn’t had a “moderately loose” stance since late 2010, when it was recovering from the global financial crisis.

Sterling reached its highest level against the euro in two-and-a-half years on Wednesday, supported by hints that the European Central Bank might slash interest rates faster than the Bank of England, though the pound still dipped against a strengthening dollar.

Cheap UK stocks finally attracted investors’ attention. According to Lipper data, UK equity funds saw inflows of $779 million in November, the first positive month since October 2020.

Britain’s economic output slipped 0.1% in October, following a similarly sized contraction the previous month. Forecasters – who had expected a 0.1% gain – said the economy is now in danger of shrinking in the fourth quarter.

British lender Close Brothers said it had been granted permission by the UK Supreme Court to appeal a ruling requiring motor finance brokers to fully inform car loan customers about commissions. Bank shares jumped higher on hopes that they wouldn’t be fined. The lender had paused new motor loans in late October following the court ruling.

Fears of a hiring market slowdown increased as specialist recruiter SThree warned it was expecting a sharp fall in profits next year, sending its shares and those of other London-listed headhunters lower.

Ashtead announced plans to shift its primary listing to New York from London in the next 12 to 18 months, the latest company to make the move to the more attractive US market.

The housing market remained strong. The RICS monthly house price gauge jumped in November to its highest level since September 2022. Mortgage lenders Nationwide and Halifax also reported a sharp pickup in house prices during the month, while Bank of England data showed lenders in October approved the most mortgages since August 2022.

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