The central banks are going to announce the path of interest rate reduction in the critical week

The US Federal Reserve, the European Central Bank and the Bank of England are all expected to raise interest rates again this week when they announce their first policy of 2023.

Economists will be closely watching policymakers for clues about the path of future rate hikes as the three major central banks try to engineer a soft landing for their respective economies without allowing inflation to pick up again. .

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All three banks are expected to reiterate their commitment to return inflation to targets close to 2 percent, but recent positive data has bolstered hopes that central banks could finally slow the pace of interest rate hikes.

Nick Chatters, director of fixed income at Aegon Asset Management, said market watchers will be tasked with telegraphing from this week’s press conferences where Federal Reserve Chairman Jerome Powell and European Central Bank President Christine Lagarde will discuss “the final rate What do they think and how do they think? They intend to keep monetary policy tight before normalization begins.

The Federal Open Market Committee concludes its meeting on Wednesday, before the Bank of England and European Central Bank deliver their decisions on Thursday.

Federal Reserve

Since the FOMC’s December meeting, economic data showing slowing wage growth and inflationary pressures, along with some signals of activity growth, have strengthened the case for the Fed to raise interest rates by 0.25% – a significant change from Strange movements have been seen. In 2022

The market is now pricing in that possibility, but the big question is what the FOMC will signal about further rate hikes in 2023.

“We think the Fed’s path this year is better viewed in terms of a target to be met rather than a target level for the funds rate.” Goldman Sachs David Mericle, chief U.S. economist, said in a note on Friday.

“The goal is to continue in 2023 what the FOMC successfully began in 2022 by keeping the economy on a path of below-potential growth in order to create a persistent but mild rebalancing in the labor market, which in turn should ease conditions. To keep inflation constant. At 2 percent.”

Federal Reserve officials have indicated that there is still some way to go to ensure that inflation remains at this level. Mericle said a significant “rebalancing of the labor market” is needed, as the gap between jobs and workers is still about 3 million above pre-pandemic levels.

This requires a slower growth path for a longer period of time. Goldman expects a 25 basis point hike on Wednesday, followed by two more hikes of the same magnitude in March and May — steps that would push the target rate for the Fed funds rate to a peak between 5 percent and 5.25 percent.

“If the recent weakening in business confidence captured by survey data dampens hiring and investment more than we think, fewer increases may be needed, replacing more rate hikes,” Mericle said.

But if the economic growth slows down due to the tightening of the fiscal and monetary policies of the past, more increases may be needed.

He suggested that uncertainty about the pace of growth could lead the Fed to “recalibrate” and find itself in a “stop-and-go” pattern on rates later in the year.

European Central Bank

The European Central Bank has telegraphed a 50 basis point hike for Thursday and vowed to stay on track to tackle inflation, but uncertainty remains over the future path of interest rates.

Eurozone inflation fell for a second month in a row in December, while the bloc’s economy unexpectedly grew 0.1 percent in the fourth quarter of 2022, showing on Tuesday, curbing fears of a recession.

The expected increase of half a unit will bring the deposit rate of the European Central Bank to 2.5%. The governing council is also expected to provide details of plans to reduce its APP (asset purchase program) portfolio totaling 60 billion euros ($65 billion) between March and June.

In a note on Tuesday, Berenberg predicted that the European Central Bank would “likely” confirm its previous guidance for another 50 basis points increase in mid-March, followed by further tightening in the second quarter.

The German investment bank emphasized that while there were positive signs in core inflation, sticky core inflation – which reached 5.2% in December – had not yet peaked.

We expect the ECB to leave the size and number of moves open in the second quarter. Our risks are for only one final 25 basis point increase in interest rates in the second quarter to bring the deposit and principal repayment rates to 3.25% and 3.75%. Berenberg Chief Economist Holger Schmieding is bullish on May 4.

In line with the ECB’s recent “higher for longer” slogan, European Central Bank President Christine Lagarde is likely to scale back market expectations that the bank will start cutting rates again later this year or early 2024.

After cutting rates from 75 basis points to 50 basis points in December, the European Central Bank alarmed markets by arguing that it would need to increase at a steady pace to reach levels that are sufficiently restrictive. Schmieding said this will be one to watch Thursday:

“The ECB will likely confirm that it will advance at a ‘constant pace’ (read: 50 basis points in March and possibly beyond) without prior commitment to a 25 or 50 basis point move in May,” Schmieding said.

But since rates will now be 50 basis points higher than at the ECB’s last press conference, doves may suggest that the ECB should now use a more lenient term than “significantly”.

Bank of England

A key distinction between the Bank of England’s mandate and that of the Federal Reserve and European Central Bank is the bleak outlook for the UK economy.

The Bank had previously forecast that the UK economy was entering its longest recession in history, but gross domestic product unexpectedly rose 0.1% in November after beating expectations in October, suggesting the recession may be ending. Not the promised depth.

However, the International Monetary Fund on Monday cut its forecast for UK GDP growth in 2023 to -0.6%, making it the world’s worst-performing major economy after Russia.

Most economists expect the Monetary Policy Committee to decide differently in favor of another 50 basis point hike on Thursday – raising the Bank Rate to 4% – but expect a weaker tone than in recent meetings.

Barclays expects a 7-2 split in favor of a final “forced” hike of 50 basis points, with communications forecasting a move to 25 basis points in March.

“This may be indicated by the removal, or softening, of the ‘strong’ component of forward guidance. Such a change would be consistent with our call for two final hikes of 25bp in March and May, bringing the terminal 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 much closer 5-4 majority in the MPC in favor of a 50 basis point hike, with four opponents split between “no change” and a 25 basis point increase. He said the bank had “no easy options”.

“Given concerns about inflationary damage, we believe the majority of the MPC will consider raising the Bank Rate to 4.00% as prudent risk management, but we still do not think it will want to raise the Bank Rate much higher than this. rate increase, Clarke said in a note on Friday.

Santander expects a “doubling but modest increase” in February and March, and Clarke suggested that Governor Andrew Bailey was “optimistic” about headline inflation slowing, amid growing concerns about the outlook for Britain’s housing market.