Central banks set to signal interest rate glide path in crucial week

A screen shows the Fed 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 are all expected to raise interest rates again this week, as they make their first policy announcements in 2023.

Economists will be watching policymakers’ rhetoric for signs on the path to future rate hikes this year, as the three major central banks try to engineer a soft landing for in their respective economies without allowing inflation to regain momentum.

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All three banks are expected to reiterate commitments to return inflation to targets of around 2%, but recent positive data have given hope that central banks will eventually able to slow down the pace of rate hikes.

Nick Chatters, fixed income manager at Aegon Asset Management, said the task for market watchers is to “telegraphically infer” from this week’s press conferences what Fed Chairman Jerome Powell and ECB President Christine Lagarde think about ” terminal rate,” and how they have long intended to keep monetary policy tight before starting to normalize.

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

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Since the FOMC’s December meeting, economic data showing easing wage growth and inflationary pressures, along with other concerning signals of activity growth, have strengthened the case for Fed to make a 0.25 percent rate increase – a marked downshift from the jumbo moves seen. in 2022.

The market is now pricing in this event, but the main question is what the FOMC will mean about further rate hikes in 2023.

“We think the Fed’s path this year is best thought of as a goal to be met rather than a target level of the funds rate to be reached,” Goldman Sachs US Chief Economist David Mericle said in a note on Friday.

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“The goal is to continue in 2023 what the FOMC successfully started in 2022 by keeping the economy on a low-potential growth path to steadily but slowly rebalance the labor market, which in turn will create those condition for inflation to be sustained. of 2%.”

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Fed officials indicated that there is still a way to go before they are confident that inflation will settle at this level. Mericle said more “rebalancing of the labor market” is needed because the gap between jobs and workers is still 3 million above pre-pandemic levels.

It will take a slow growth path for a long time. Goldman expects a 25 basis point hike on Wednesday, followed by two more hikes of the same measure in March and May – in moves that would bring the target rate for the Fed funds rate to a peak of between 5% and 5.25%.

“A smaller increase should be if the recent weakening of business confidence captured in the survey data dampens hiring and investment more than we think, displacing more rate hikes,” Mericle said.

“But more increases could be made if necessary when the economy picks up as the drag on growth from past fiscal and monetary policy tightening dissipates.”

Uncertainty over the pace of growth could lead the Fed to “recalibrate” and find itself in a “stop-and-go” rate pattern later in the year, he suggested.


The ECB telegraphed a 50 basis point hike for Thursday and pledged to stay the course in tackling inflation, but uncertainty remains over the future rate trajectory.

Euro zone inflation fell for a second consecutive month in December, while it was revealed on Tuesday that the bloc’s economy unexpectedly expanded by 0.1% in the fourth quarter of 2022, curbing fears of a slowdown. retreat.

The expected half-point increase would bring the ECB’s deposit rate to 2.5%. The Governing Council is also expected to detail plans to reduce the APP portfolio (asset purchase program) by a total of 60 billion euros ($65 billion) between March and June.

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In a Tuesday note, Berenberg projected that the ECB would “probably” confirm its first guidance for an additional 50 basis point hike in mid-March, followed by further tightening in the second quarter.

The German investment bank emphasized that, while there are positive headline inflation signs, the peak inflation – which reached 5.2% in December – has not yet peaked.

“We expect the ECB to leave the size and volume of its moves in Q2 open. The risks to our call for only one final 25bp rate hike in Q2 to capture deposits and primary refinancing rates to a peak of 3.25% and 3.75%, respectively. , on 4 May tilted to the upside, “said the Berenberg Chief Economist Holger Schmieding.

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“In line with the ECB’s recent mantra of ‘higher for higher’, ECB President Christine Lagarde is likely to push back against market expectations that the bank will start cutting rates again late this year or early 2024.”

In slowing its rate hike from 75 basis points to 50 basis points in December, the ECB spooked markets by saying that rates should “rise significantly in a sustained speed to reach a level that is sufficiently tight.” Schmieding said this passage is one to watch for Thursday:

“The ECB is likely to confirm that it is advancing at a ‘steady pace’ (read: 50bp in March and possibly beyond) without pre-committing to either a 25bp or 50bp move in May,” said said Schmieding.

“But as rates will now be 50bp higher than at the previous ECB press conference, the doves may suggest that the ECB should now use a slightly softer term than ‘significant’.”

The Bank of England

A key difference between the role of the Bank of England and the Fed and ECB is the continued gloomy outlook for the UK economy.

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The Bank had previously forecast that the UK economy was entering its longest recession on record, but GDP unexpectedly grew by 0.1% in November after also beating expectations in October, suggesting the recession may not be the same. depth of the promise.

However, the International Monetary Fund on Monday downgraded its projection for UK GDP growth in 2023 to -0.6%, making it the worst performing major economy in the world, behind Russia.

Most economists expect a split decision among the Monetary Policy Committee in favor of another 50 basis point increase on Thursday – taking the Bank rate to 4% – but expect a more dovish tone than the bag -or meetings.

Barclays expects a 7-2 split vote in favor of a final “strong” 50 basis point increase, with communications foreshadowing a move down to 25 basis points in March.

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“This could be signaled by removing, or softening, the ‘strong’ side of forward guidance. Such a tweak would be consistent with our call for the last two 25bp hikes in March and May, bringing the terminal rate of 4.5%, ” analysts of the British lender said in a note Friday.

Victoria Clarke, chief UK economist at Santander CIB, expects a closer 5-4 MPC majority in favor of a 50 basis point increase, with the four dissenters split between “no change ” and an increase of 25 basis points. He said that the Bank “does not have easy options.”

“Due to the concern about the damage caused by inflation, we believe that the majority of the MPC will consider raising the Bank Rate to 4.00% to be prudent risk management, but we still do not think that we want to take the Bank Rate which is much higher. it,” Clarke said in a note on Friday.

Santander expects a “double but dovish hike” in February and March, and Clarke suggested Governor Andrew Bailey was “optimistic” looking at falling headline inflation, while growing concerned about the prospects for UK housing market.


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