Hike rates

The Bank of England and the US Federal Reserve will hike rates next week, but by how much?

The US Federal Reserve and bank of england will be in the spotlight for investors next Wednesday and Thursday as they unveil interest rate decisions and provide commentary on the expected further monetary tightening, which has had an overwhelming influence on stock market behavior this year.

In September, Fed Chairman Jerome Powell indicated that the Federal Open Markets Committee was “strongly committed” to bringing inflation down with more rate hikes after three 75 basis point hikes in June, July and September and that there was no painless way to bring inflation down. lower.

It was expected at the time that there would still be 100 basis points by the end of this year at the bare minimum.

But this month there has been growing speculation in the market that the Fed will hike another 75 basis points, but also signals a potential move to lower rate hikes in the months ahead. .

A Wall Street Journal report this month suggested that some Fed officials are worried about excessive tightening, with a big debate to be had at this week’s meeting.

“There are growing signs of an economic slowdown and liquidity issues in bond markets,” Deutsche Bank said, as weaker-than-expected Bank of Canada hikes and dovish ECB musings weighed heavily. “fueled another price attempt into a pivot”.

“So having the Fed pour cold water on those expectations will be key.”

Most economists expect the central bank to hike 75 basis points next week and into December.

Deutsche expects rates to reach a terminal rate of 4.9% in February, with rate cuts at the end of 2023, after a mild recession.

But Michael Hewson of CMC Markets noted that while core inflation is expected to decline to 4.5% this year, before falling to 2.1% by 2025, there has been “a succession of speeches from the Fed raising the prospect of even more aggressive tightening, with the prospect that we could see another 150 basis points by the end of the year, which would put the fed funds rate at 4.75% by the end of the year “.

Unease with the pace of the current bull cycle has only been expressed publicly by Fed Vice Chairman Lael Brainard, although San Francisco Fed Chair Mary Daly has said that after November could be the time to talk about slowing the pace of increases.

Fueling the fire of market speculation ahead of the FOMC decision will be the Chicago PMI survey on Monday, ISM manufacturing data and price numbers on Tuesday and MBA mortgage applications data earlier on Wednesday.

Bank of England decision

A day later, policymakers in London will have their turn after a few weeks of silence after the Bank of England was forced to intervene in bond markets after the calamitous Liz Truss-Kwasi Kwarteng tax fiasco.

The weakness of the pound in recent weeks, together with political unrest, has had a significant upward impact on inflation in the UK, as well as on the housing market, adding to the effects of rate hikes until this year by the Bank’s Monetary Policy Committee. .

There is a bigger question mark over the size of Threadneedle Street’s potential upside, whether it is 50bps or 75bps.

With new Prime Minister Rishi Sunak saying the UK is “facing a deep economic crisis” in his maiden speech and new Chancellor Jeremy Hunt is expected to announce major tightening measures in a budget statement on November 17, the BoE’s monetary policy committee has a lot to do. ruminate.

“Central bank staff are liaising with Treasury officials and will already have an overview of the new fiscal policy settings as input to next week’s rate decision,” Rabobank said, anticipating a rise of 75 basis points on Thursday and a possible rate peak of 4.75%.

“Even though the markets have now calmed down, we will learn on Thursday that monetary and fiscal policy is going to be significantly tighter than anyone had imagined in mid-September.”

CMC’s Hewson said the tightening of fiscal policy means that “the scope for the Bank of England to be more aggressive would now be more limited, due to concerns about the impact on demand.

“It seems a little late at the moment, given that the government’s actions on raising taxes probably mean that any recession is now likely to be much more prolonged, which could mean that the pound remains under more pressure. long time.

He said it seems “more likely than not” there will be a 50 basis point hike.

But Ruth Gregory at Capital saving believes it is closer to whether the MPC will deliver a 75bps or 100bps hike, due to mounting domestic inflationary pressures and tightness in the labor market.

“Overall, we think the MPC will go 100 basis points, pushing the discount rate from 2.25% to 3.25%,” she said.

Along with this decision, the MPC will also provide its latest economic forecasts for inflation and GDP.