The world’s top central banks are set to wrap up 2022 with hefty rate hikes as their battle against inflation continues. With expectations for a half-point hike from the Federal Reserve at Wednesday’s meeting already baked in, investors will instead be focusing on indications of how high rates may ultimately rise. Meanwhile, the Bank of England and the European Central Bank are also expected to deliver half-point rate hikes when they meet on Thursday.
GBP: A deteriorating economic outlook is unlikely to stop the Bank of England hiking rates by 50-basis points to 3.5%, which would be the highest since the 2008 financial crisis, when it meets on Thursday. Furthermore, the U.K. is to release CPI data for November on Wednesday which may show that inflation has peaked after hitting a 41-year high of 11.1% in October, more than five times the BoE’s 2% target. Much of the increase has been driven by the energy price shock resulting from Russia’s war in Ukraine. However, other factors such as labour shortages caused by Brexit and the COVID-19 pandemic could make inflation slow to fall. Ultimately, Britain’s economy is heading into a recession and households are facing a historic squeeze on living standards after the government introduced a tough budget to try to restore Britain’s fiscal reputation.
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EUR: Market watchers are anticipating the ECB to deliver a 50-basis point rate hike when it meets on Thursday. The expectation follows last month’s data release showing that annual inflation slowed for the first time in one-and-a-half years, ticking down to 10% from 10.6% in October. The ECB has raised rates by 200 basis points since July, its fastest pace on record, but inflation remains well above its 2% target. While a slowdown in the pace of rate increases may be coming, the ECB is far from done and markets will be looking for clues on where the key 1.5% deposit rate will end up. Ultimately, policymakers will keep sounding hawkish and aggressive as they want inflation expectations to remain anchored.
USD: The U.S. central bank has raised interest rates by 375 basis points this year, including four consecutive 75-basis point hikes, in the fastest rate-hiking cycle since the 1980s, to combat soaring inflation. Investors will be closely watching Fed Chair Jerome Powell’s last news conference of the year following recent indications that it could be time to slow the pace of rate increases. Fed funds futures point to a 78% chance the Fed will raise interest rates by 50-basis points on Wednesday, with a 21% chance of a 75-basis point hike. Ultimately, while the Fed has indicated that the pace of increases is likely to slow, interest rates are likely to end up at a higher level than officials anticipated back in September. Therefore, the focus should shift onto signals for how high rates may ultimately raise in 2023.
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