Major central banks are ready to signal the slipping path for interest rates in a crucial week for monetary policy

He US Federal Reserve, european central bank Y bank of england They are all expected to raise interest rates once more this week as they make their first 2023 policy announcements.

Economists will closely watch the rhetoric of politicians for clues about the path of future rate hikes this year, as the three main central banks try to engineer a soft landing for their respective economies without allowing inflation to regain momentum.

All three banks are expected to re-emphasize commitments to bring inflation back to near 2% targets, but recent positive data has fueled hopes that central banks will eventually be able to ease the pace of rate hikes.

Nick Chatters, manager of fixed income at Aegon Asset Management, said the job for market watchers is to “telegraphically infer” from this week’s press conferences what Fed Chairman Jerome Powell and ECB chairwoman think. , Christine Lagarde, on the “terminal rate” and how long they intend to maintain restrictive monetary policy before beginning to normalize.

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

the federal reserve

Since the December FOMC meeting, economic data showing declining wage growth and inflationary pressures, along with some more worrying signs of activity growth, have strengthened the case for the Fed to enact a rate hike. rate of 0.25 percentage points, a marked downward change from the giant moves seen in 2022.

He the market is now pricing in this eventualitybut the key question is what the FOMC will say about further rate hikes in 2023.

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

“The goal is to continue in 2023 what the FOMC started so successfully in 2022 by keeping the economy on a path of below-potential growth to rebalance the labor market steadily but gently, which in turn should create the conditions for inflation to stabilize sustainably”. at 2%.”

Fed officials have indicated that there is still some way to go before they are confident that inflation will settle at this level. Mericle said substantial “labor market rebalancing” will be needed as the gap between jobs and workers is still around 3 million above its pre-pandemic level.

This will require a slower growth path for a while longer. Goldman expects a 25 basis point hike on Wednesday, followed by two more hikes of the same scale in March and May, in steps that would take the Fed funds rate target rate to a peak of between 5% and 5%. 25%

“Fewer increases may be needed if the recent weakening in business confidence captured by survey data depresses hiring and investment more than we think, replacing additional rate increases,” Mericle said.

“But more increases may be needed if the economy picks up again as the drag on growth from past fiscal and monetary policy tightening fades.”

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, he suggested.

the ECB

The ECB has telegraphed a 50 basis point hike for Thursday and vowed to stay the course in the fight against inflationbut uncertainty persists regarding the future trajectory of the rate.

Eurozone inflation fell for the second month in a row in December, while on Tuesday revealed that the the bloc’s economy unexpectedly expanded by 0.1% in the fourth quarter of 2022, curbing recession fears.

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

In a note on Tuesday, Berenberg projected that the ECB will “likely” confirm its earlier guidance of a further 50 basis point hike in mid-March, followed by further tightening in the second quarter.

The German investment bank noted that while there are positive signs in headline inflation, the more dovish core inflation, which hit 5.2% in December, has yet to peak.

“We expect the ECB to leave open the size and amount of its moves in the second quarter. The risks of our request for only a final 25bp rate hike in the second quarter to bring deposit and core refinancing rates to peaks of 3.25% and 3.75%, respectively, on May 4 are tilted higher,” said Berenberg chief economist Holger Schmieding.

“In line with the ECB’s recent ‘higher for longer’ mantra, ECB President Christine Lagarde will likely reject market expectations that the bank will start cutting rates again later this year or early 2024. “.

By slowing its rate hikes from 75 basis points to 50 basis points in December, the ECB spooked markets with the claim that rates would have to “raise significantly at a steady pace to reach levels that are restrictive enough.” Schmieding said this sentence will be one to watch on Thursday:

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

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

the bank of england

A key distinction between the Bank of England’s task and those of the Fed and the ECB is the lingering gloomy outlook for the UK economy.

The Bank previously forecast that the UK economy was entering its longest recession on record, but GDP unexpectedly grew 0.1% in November after also beating expectations in October, suggesting that the recession may not be as deep as promised.

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

Most economists anticipate a split decision between the Monetary Policy Committee in favor of another rise of 50 basis points on Thursday, taking the Bank rate to 4%, but expect a more dovish tone than in recent meetings.

Barclays is expecting a 7-2 split vote in favor of a final 50 basis point “resounding” hike, with communications heralding a move lower to 25 basis points in March.

“This can be indicated by removing or softening the ‘hard’ component of the forward guidance. Such an adjustment would be consistent with our call for two final 25bp hikes 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 the 50 basis point increase, with the four dissenters split between “no change” and a 25 point increase. basic. She said the bank “doesn’t have easy options.”

“Given concerns about the damage embedded inflation would cause, we think the majority of the MPC will view an increase in the bank rate to 4.00% as prudent risk management, but we still don’t think it wants to push the bank rate too far.” on top of this,” Clarke said in a note on Friday.

Santander is expecting a “double but moderate increase” in February and March, and Clarke suggested Governor Andrew Bailey is looking “optimistically” at falling headline inflation, while growing concerned about the outlook for the UK property market. .