A screen shows the Fed interest rate announcement as a trader works on the floor of the New York Stock Exchange (NYSE), November 2, 2022.
Brendan McDermid | Reuters
The US Federal Reserve, European Central Bank and Bank of England All are expected to raise rates again this week, when they make their first policy announcement in 2023.
Economists will be closely watching policymakers’ rhetoric for clues about the path to future rate hikes this year, as the three major central banks try to engineer a shot soft landings for their respective economies without allowing inflation to regain momentum.
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All three banks are expected to re-emphasize commitments to bring inflation back to near 2% target, but recent positive data has boosted hopes that central banks will eventually be able to do so. slow rate of interest rate increase.
Nick Chatters, fixed income manager at Aegon Asset Management, said it’s up to market watchers to “telegraph inferences” from this week’s press conferences Fed Chair Jerome Powell and ECB President What Christine Lagarde is thinking about “terminal interest rates” and how they intend to maintain restrictive monetary policy for a long time before normalization begins.
The Federal Open Market Committee wraps up its meeting on Wednesday, before the Bank of England and the ECB deliver their decisions on Thursday.
Federal Reserve
Since the FOMC’s December meeting, economic data showing wage growth and inflation pressures easing, along with some more worrying activity growth signals, have bolstered the Fed’s ability to do interest rate hike by 0.25 percentage points – a significant change from the previously expected level. giant move seen in 2022.
The the market is currently pricing in this caseBut the key question is what the FOMC will dictate about further rate hikes in 2023.
“We think the Fed’s path this year is best thought of in terms of what it needs to accomplish rather than what the target fund rate needs to achieve,” he said. Goldman book Chief US economist David Mericle said in a note on Friday.
“The goal is to continue into 2023 what the FOMC started very successfully in 2022 by keeping the economy on a path of growth below potential in order to rebalance the labor market in a stable manner. but gently, this will create conditions for inflation to stabilize sustainably at 2%.”
Fed officials have indicated that there is still a long way to go before they are confident that inflation will stabilize at this level. Mericle said a significant “labor market rebalancing” would be needed, as the employment-to-worker gap remains about 3 million higher than pre-pandemic levels.
This will require a slower growth path over a longer period. Goldman is expected to raise 25 basis points on Wednesday, followed by two more hikes of the same size in March and May – in steps that will deliver the target rate for the Fed funds rate. to the highest level from 5% to 5.25%.
Fewer rate hikes may be needed if the recent weakening in business confidence captured by the survey data has reduced hiring and investment more than we thought, replacing Mericle, said Mericle. additional rate hikes”.
“But more may be needed if the economy picks up again as the drag on growth from past tightening of monetary and fiscal policy fades.”
He suggested that growth uncertainty could cause the Fed to “recalibrate” and fall into a “stop and go” pattern on interest rates at the end of the year.
ECB
The ECB telegraphed a 50 basis point increase for Thursday and swore resolutely against inflationbut uncertainty persists around the future trajectory of the exchange rate.
Euro zone inflation falls for the second consecutive month in December, while Tuesday revealed that The bloc’s economy unexpectedly grew by 0.1% in the fourth quarter of 2022, curbing recession fears.
A half-point increase is expected to bring the ECB’s deposit rate to 2.5%. The board is also expected to detail plans to reduce its total APP (asset purchase program) portfolio by a total of 60 billion euros ($65 billion) between March and May. 6.
In a note on Tuesday, Berenberg predicted that the ECB “probably” would confirm its previous guidance of a further 50 basis points increase in mid-March, followed by further tightening in the second quarter.
The German investment bank emphasized that, despite positive signs of headline inflation, higher core inflation – which hit 5.2% in December – has yet to peak.
“We expect the ECB to leave the size and volume of its moves open to the second quarter. Risks to our call for only a final 25 basis point rate hike in Q2. to bring the deposit rate and the main refinancing rate to the highest levels of 3.25% and 3.75% respectively, said Holger Schmieding, chief economist at Berenberg.
“In line with the ECB’s recent ‘higher for longer’ mantra, ECB President Christine Lagarde is likely to push back against market expectations that the bank will start cutting rates again on Monday. late this year or early 2024.”
After reducing the pace of rate hikes from 75 basis points to 50 basis points in December, the ECB spooked markets with its assertion that rates would need to “raise significantly at a steady rate to reach to a sufficiently limited extent.” Schmieding said the verse will be a must-see on Thursday:
“The ECB is likely to confirm that it is progressing at a ‘steady pace’ (read: 50 basis points in March and possibly beyond) without committing in advance to a 25-basis move,” Schmieding said. basis points or 50 basis points in May”.
“But since interest rates will now be 50 basis points higher than at the previous ECB press conference, doves might suggest that the ECB should now use a slightly softer term than ‘significantly’.”
Bank of England
A key difference between the Bank of England mandate and the Fed and ECB mandate is the persistently bleak outlook for the UK economy.
The bank had previously forecast that the UK economy was entering its longest recession on record, but November GDP unexpectedly increased by 0.1% after also topping expectations in October, suggesting the recession may not be as deep as promised.
However, the International Monetary Fund on Monday lowered its forecast for UK GDP growth in 2023 to -0.6%, making it the world’s worst performing major economy, after all. Russia.
Most economists predict a split decision between the Monetary Policy Committee in favor of increase by 50 basis points on Thursday – bringing Bank rates to 4% – but expect a more dovish tone than in recent meetings.
Barclays expects a 7-2 split vote in favor of an eventual “robust” 50 basis point gain, with communications heralding a move down to 25 basis points in March.
“This could be signaled through the removal or softening of the ‘strong’ component of the forward guidance. Such an adjustment would be consistent with our call for two 25-point increments. last baseline in March and May, bringing the final rate to 4.5%.” Analysts at the British lender said in a note on Friday.
Victoria Clarke, chief UK economist at Santander CIB, expects a closer majority of 5-4 at the MPC in favor of a 50 basis point increase, with four dissenters divided between “no change” swap” and increase it by 25 basis points. She said the Bank “had no easy options.”
“Due to concerns about the damage that accompanying inflation will cause, we believe the majority of MPC will consider raising the Bank Rate to 4.00% to manage risks prudently, but we still don’t think they want to take Bank Rates beyond this,” Clarke said in a Friday note.
Santander is expecting a “dozen but dovish” in February and March, and Clarke hinted that Governor Andrew Bailey is “optimistically” watching inflation fall, while increasing worried about the outlook for the UK housing market.
