The euro (EUR), Turkish lira (TRY), the Norwegian krone (NOK), and the South African rand (ZAR) were on the move on Wednesday as investors refocused on Thursday’s central bank meetings. These meetings, the first of the year, will shed more light on what officials think about the economy and provide more colour on what to expect later this year.
ECB decision aheadThe EUR/USD and EUR/GBP prices rose slightly as the ECB started its first central bank decision of 2023. This meeting comes a week after some of its officials, including Christine Lagarde, held interviews at the World Economic Forum in Davos.
A key theme about these officials was that it was too early to declare victory on inflation. This view was supported by Eurostat data, which showed that European inflation rose to 2.9% in December. Inflation will likely remain higher for longer as the crisis at the Red Sea intensifies.
The challenge for the ECB is that the bloc is also going through a major slowdown that could lead to a recession. As such, holding rates for too long could spark a deeper downturn even as the US economy surges ahead.
In this case, most analysts expect that the first ECB rate cut will happen in the second half of the year. They also anticipate at least two cuts.
Turkish lira is still languishingElsewhere, the USD/TRY and EUR/TRY remained in a tight range ahead of the first CBRT decision of the year. They are all sitting near their all-time high as investors bet on a weaker-for-longer lira.
With inflation remaining stubbornly high – it ended the year at 65% – analysts expect that the CBRT will continue hiking rates in this meeting. In this, some economists see another rate of between 100 and 200 basis points.
The challenge for the CBRT is that economists see the country’s inflation peaking in May this year. Also, while interest rates are attractive to savers, they remain much lower than inflation. That has led to a loss of confidence in the Turkish lira, making it difficult to attract buyers.
Norges Bank decision aheadThe USD/NOK and EUR/NOK have held steady in the past few days as traders wait for the Norges Bank decision. This will be an important rate decision because it has been the most hawkish central banks in Europe. It went against the trend and hiked by 25 basis points in December to 4.50%. It has moved them from zero during the pandemic.
Therefore, with Norway’s inflation falling, economists expect the bank to leave rates unchanged and avoid talk of cuts. In a note, a JPMorgan analyst said:
“There is no good reason for a dovish pivot and a course correction is quite unlikely at interim meetings, given past decisions. Norges Bank will wait for the March meeting to make any stronger conclusions, based on additional data on the domestic side.”
SARB decision aheadThe South African Reserve Bank (SARB) will be the next major central bank to watch on Thursday. This decision comes at a time when the USD/ZAR pair has tumbled by almost 2% from its highest point this year. The South African rand has done better than other African currencies like the Nigerian naira, Kenya shilling, and Ethiopian birr.
SARB will likely leave interest rates unchanged at 8.25% and possibly point to a rate cut later this year. Besides, the most recent data showed that the headline Consumer Price Index (CPI) dropped to 5.1% while the core CPI remained at 4.5%. These numbers were better than expected and were inside the bank’s comfortable band.
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