Cash & Liquidity Management
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Bank of England Surprises Investors with December Rate Hike

Northern Trust Asset Management Monthly Market Commentary for December 2021 – Exclusive Insight for TMI Subscribers

Eurozone Market Update

The European Central Bank unanimously agreed in December to leave key interest rates unchanged and add some colour to their quantitative easing plan. Once the Pandemic Emergency Purchase Programme (PEPP) expires at the end of March, holdings will be fully reinvested for longer – at least to the end of 2024 – allowing the flexibility of the PEPP to be retained and for net purchases to be restarted if needed. Net purchases in the Asset Purchase Programme will also be raised to €40bn per month during the second quarter and €30bn per month in the third quarter, before returning to €20bn per month from the fourth quarter onwards. Finally, the special discount period on existing Targeted Longer-Term Refinancing Operations will close at the end of June, moving from -1.00% to -0.50%.

UK Market Update

Following market expectations of a rate hike from the Bank of England in November that never materialised, investors were caught out for the second meeting in a row in December when the bank voted 8-1 to raise interest rates from 0.10% to 0.25%. This came despite the tightening of Covid-19 restrictions in the UK as well as short-term economic uncertainty. The Monetary Policy Committee noted that “the Omicron variant is likely to weigh on near-term activity.” The bank expects inflation to remain around 5% throughout the winter and peak at around 6% in April 2022.

US Market Update

The monthly Consumer Price Index rose 0.8% in November, the fastest rise in 40 years. Together with an improvement in employment, this caused the Federal Reserve to increase the pace of tapering from $15bn to $30bn, so tapering should conclude by March. According to the Fed’s new “dot plot” chart, three rate hikes are expected in 2022 and two in 2023. This contrasts with the previous dot plot with no hikes in 2022 and three in 2023 (see Chart of the Month). Fed fund futures are also pricing in three rate hikes in 2022, with the first in May. The US Senate voted 50-49 to raise the debt ceiling by $2.5tr moving the new debt ceiling date until after the mid-term elections.