Hike rates

Guide to central banks and the race for rate hikes

Several central banks have taken a decidedly more hawkish stance over the past two months. Our economists look at what is likely to come next.

US Federal Reserve

Fed Chairman Jerome Powell following January’s FOMC meeting suggests the central bank is serious. With a rate of 7% and a much faster-than-expected tightening, he hasn’t ruled out raising rates at every FOMC meeting this year, arguing that they have plenty of time to do so without harming the lending market. ‘use.

The market is even pricing in the possibility of a 50 basis point move, although we don’t think that’s likely given that the Omicron wave severely dampened activity and job creation in early 2022. Instead, they are expected to raise rates by 25 basis points in consecutive meetings. in March, May and June, with two further increases in the second half.

They will also start to reduce their balance sheet (quantitative tightening) from Q3, which is likely to do the heavy lifting for policy tightening. This means that the eventual peak in the target federal funds rate will likely be closer to 2% than 3%.

European Central Bank

Even if inflation remains at high levels for longer than expected, we don’t think we can expect an interest rate hike anytime soon. The drivers of high inflation and higher inflation projections are still driven primarily by supply-side constraints, not demand.

In other words, a tightening of monetary policy would do little to ship containers from Asia to Europe faster or lower energy prices. Consequently, the ECB must make a fine distinction between a reduction in the need to continue to stimulate the economy and an actual reduction in inflation.

With high inflation and inflation projections surrounded by high uncertainty, a return to pre-crisis levels, and labor shortages soon leading to higher wages, we expect the ECB steps up the cut and eventually halts net asset purchases in September, leaving the door open for a rate hike, perhaps even before the end of this year.

bank of england

The Bank of England met for the second consecutive time, amid continued concerns about high rates. In fact, four out of nine policymakers voted for an even faster 50 basis point hike.

Clearly, the Bank is keen to act preemptively, with inflation expected to remain well above target this year. Further rate hikes are expected in March and May. The fact that the Bank has now embarked on quantitative tightening is unlikely to change that timeline that much.

However, if our rate hike forecast is about right, the BoE will also “consider” actively selling gilts back into the market, and that could happen before the summer. This is a bumpy process, and we suspect that if the Bank does end up doing it, it will be in fairly low volumes.

Nevertheless, this is uncharted territory, and we believe that at this stage the Bank could pause rate hikes to gauge the impact. We also suspect that by the end of the year, some of the current inflation concerns will have subsided. This suggests that the five bulls markets are pricing this year may well turn out to be an overestimate.

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