Hike rates

Bank of England and Federal Reserve set to hike rates, but forecast will be key

Interest rate updates are due next week from the US Federal Reserve and the Bank of England and hikes are firmly on the minds of both central banks.

The Fed is due to announce its rate decision on Wednesday after previously signaling that it wants a 0.5% hike in its federal funds rate.

US inflation, which hit a new 40-year high on Friday, June 10, is unlikely to change the Fed’s current thinking, economists say.

“The Federal Reserve is expected to follow May’s 50 basis point (0.5%) interest rate hike with another 50 basis point hike at the next FOMC meeting, bringing the fed funds target range at 1.25%-1.5%,” said economists at ING Bank.

Following the inflation data, ING said it was optimistic – but “low conviction” hope – that May marks the peak of headline inflation.

“With demand continuing to exceed the supply capacity of the US economy and with supply factors showing little sign of improvement in the near term, it falls to the Fed to rein in the demand side of the equation with hikes. current rate.

“The extent of inflationary pressures in the economy should alarm the Fed and will certainly keep the hawks in the ascendant and weaken the case for those arguing for a possible pause in the Fed’s hiking path in September.”

With a 50 basis point Fed hike “just about guaranteed”, BDSwiss’ Marshall Gittler said the market would “want to get some insight into how it sees risk going forward” and whether it sees inflation peak or continue to rise.

In this regard, the focus will likely be on the Fed’s new economic projections, containing inflation forecasts and the legendary “dot chart” of policymakers’ forecasts for the fed funds rate.

UK heading for fifth rise

The Bank of England, meanwhile, has also been on a steady upward trajectory for months with the Bank Rate increasing by 25 basis points to 1% at its May 2022 meeting, the fourth hike in a row.

Borrowing costs in the UK are now the highest since the start of 2009, although three members of the Monetary Policy Committee (MPC) wanted rates to rise even further last time inflation is set to rise further throughout the rest of the year and average slightly above 10% to peak in the fourth quarter of 2022.

The bad news is that another hike is very likely this month, followed by further MPC hikes in August, September, November and December when the base rate hits 2.25%.

Most economists predict the committee will stick to 25 basis point moves, “as threats to the growth outlook continue to strengthen,” Peel Hunt said.

However, with the Fed raising rates at a pace of 50 basis points and the European Central Bank signaling a similar move for September, the MPC could take the opportunity to join the pack and raise rates even faster, Bernberg said. , putting a 30% chance on a 50 basis point upside. at the June or August meeting.

But with the economy beginning to stutter as the highest inflation in the G10 squeezes household and business incomes along with another round of tax increases, the MPC must “step between fighting against inflation and the already tottering economy falling down the stairs”. says Gittler.

“People will want to get a glimpse of how this debate is unfolding among MPC members.”

Thus, the main impact of the BoE meeting “will not come from what they do… but from what they say or imply”.

If the hawks are on the rise, it could help boost the pound from its recent lows, while a pullback could send the pound down to $1.20.

The Swiss and Japanese central banks will also meet in the coming week, with their meetings not in much doubt either – although the two are unlikely to do anything.