Economy 2 MIN READ

BUZZ-COMMENT-Diverging central bank policy may spark FX volatility next year

December 16, 2021By Reuters

There is a lot of monetary policy divergence among central banks that should lead to greater volatility for currencies next year.

The most significant split is between the BOE, which surprised many in the market by hiking on Thursday, and the ECB, BOJ and SNB, all intent on holding interest rates down – while the Federal Reserve is accelerating bond tapering and may hike three times next year.

Indonesia’s central bank stressed it will not change monetary policy because of the Fed, while the Philippine and Taiwan central banks held rates at very low levels, though Taiwan may hike next year.

Such divergence between emerging market central banks and the Fed is very unusual, with most generally following U.S. monetary policy and usually doing it swiftly.

Central banks in Russia, Brazil and Chile have hiked rates aggressively, while several in central and Eastern Europe have done so repeatedly to little effect and Turkey has slashed rates, resulting in the lira’s collapse.

Since the Fed announced a taper in June there’s been a sea change in currency positions and a rise in volatility. Greater divergence unfolding this month could lead to much more volatility, with big changes for currencies spurring speculation and forcing traders to adjust expectations and hedges.

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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)


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