The 24-hour hike that ends a year of fighting inflation

The 24-hour hike that ends a year of fighting inflation

(Bloomberg) – The world’s biggest central banks will end the most aggressive year for interest rate hikes in four decades this week as their fight against inflation still isn’t over, even as their economies slow. .

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The US Federal Reserve is expected to raise its benchmark rate by 50 basis points on Wednesday to a range of 4% to 4.5%, the highest since 2007, and signal further hikes in early 2023.

A day later, the European Central Bank and the Bank of England are expected to follow with half-point moves. And higher borrowing costs are also to be expected in Switzerland, Norway, Mexico, Taiwan, Colombia and the Philippines.

The year ends much differently than it began. By January, most policymakers were acknowledging that they had been wrong to bet that the 2021 inflation spurt would subside soon, but still assumed that they could restrain prices with a constant restraint policy.

Instead, several metrics show how an acceleration in global inflation to around double digits has forced them to squeeze hard:

  • Bank of America Corp. spotted about 275 rate hikes this year, enough for one each trading day, with just 13 cuts

  • More than 50 central banks have executed once-rare 75 basis point hikes, with some joining the Fed in doing so repeatedly

  • A Bloomberg Economics gauge of global rates is expected to end the year at 5.2%, down from 2.8% in January

Although there are increasing signs that inflation has peaked in most places, the big question now is what will happen in 2023.

In the worst case, inflation proves stubborn and recessions begin, creating a stagflationary nightmare for central banks. The best hope is that consumer price growth recedes quickly enough to allow policymakers to stop raising rates and consider cutting them to stimulate growth.

While many investors expect a turnaround at some point, Fed Chairman Jerome Powell and ECB President Christine Lagarde, who will both speak this week, say their goal remains to fight inflation, even if it hurts demand and employment.

Federal Reserve

While the Fed is expected to begin to temper the pace of monetary policy tightening this week with a half-point hike, the target overnight bank lending rate will continue to be raised into early 2023.

Another 50 basis point increase would equate to 4.25 percentage points of interest rate increases in 2022, a year that saw inflation soar to its highest level in four decades and left policymakers politicians scramble.

Fed officials, who wrap up their two-day policy meeting on Wednesday, will get a final spike in a key inflation indicator when the government releases November’s consumer price index on Tuesday. Economists predict a 0.3% increase in the overall and basic measure which excludes food and fuel. On a yearly basis, both gauges are moderating.

European Central Bank

The ECB will likely raise rates by 50 basis points, after inflation in the euro zone slowed for the first time in 1 1/2 years last month. Still, with consumer price growth still at 10%, a third consecutive move of 75 basis points cannot be completely ruled out and some of the more hawkish rate regulators have suggested they would support such a move. The Governing Council’s decision will also be influenced by new quarterly economic forecasts, which will likely see a downward revision to growth and an upward revision to inflation projections for 2023.

In addition, policymakers must decide on the main pillars of their debt repayment strategy of nearly 5 trillion euros ($5.2 trillion). The actual process – known as quantitative tightening or QT – will not begin until next year, with economists expecting it to start in the first quarter.

bank of england

The BOE is expected to raise its benchmark lending rate by half a point to 3.5%, which would be the highest since 2008. With inflation at a 41-year high of 11.1% and consumers Expecting increasingly high prices for the next few years, policymakers led by Governor Andrew Bailey said they would act forcefully to prevent a wage-price spiral.

The darkening economic outlook makes this month’s decision more difficult than the previous one. A recession is now underway and expected to last through 2024, and households are suffering from the deepest cost of living squeeze on record. Energy prices are at least six times higher than usual and colder than normal weather is rocking the UK for the first time since last winter.

Swiss National Bank

Switzerland also faces runaway inflation, but at 3% – less than a third of that of the surrounding eurozone – SNB policymakers are likely to opt for a half-point move instead of repeating the move. oversized by 75 basis points from September.

The strong franc – for years a thorn in the side of SNB Chairman Thomas Jordan – now supports the economy as it allows the Swiss to avoid imported inflation. The central bank is always likely to reiterate that it is willing to intervene in the currency markets if necessary.

Norway Bank

Norway’s central bank is set to raise its key rate by 25 basis points as inflation data last month showed a slowdown in headline and underlying price growth. The numbers have allowed speculation about bigger increases in borrowing costs to recede, with some analysts growing confident that December’s rise will be the last of the cycle.

Other recent data releases highlighting the bleakest economic outlook since the financial crisis have also supported this view, although the latest Norges Bank estimates from September point to a peak rate of 3% over the winter. , forecasting a further quarter-point hike early next year.

Mexico & Colombia

The central banks of Mexico and Colombia are lifting the curtain this week on an unprecedented year for monetary policy in Latin America.

If the week’s two decisions match forecasts, Latin America’s five major inflation-targeting central banks will have raised rates by a cumulative 30.75 percentage points in 2022, setting a new annual record thanks to 40 rate hikes , four breaks and no reduction.

Mexico’s central bank, known as Banxico, is expected to raise its key rate for a 13th straight meeting to 10.50% with a half-point hike. While headline inflation has peaked and is heading back toward the 3% target, core readings remain above 8%. Consensus among analysts calls for Banxico’s terminal rate at 11% after further tightening in early 2023.

On Friday, expect Banco de la República to deliver a third straight 100 basis point hike and an 11th straight overall to put the key rate at 12%. Economists see this as the end of the bull cycle, although some analysts put the first 100 basis points at 13%.

Elsewhere in the global economy

The Hong Kong Monetary Authority will go along with the Fed, due to the currency peg, meaning another likely rate hike, while the central banks of the Philippines and Taiwan are also expected to rise.

The Bank of Russia is expected to keep rates unchanged on Friday, its latest round of easing coming to an end as inflation risks rise. The Kremlin is touting a weaker-than-expected GDP contraction this year, but the central bank has warned that new G-7 restrictions on oil sales could affect output as soon as they take effect next year.

Beyond the central bank, markets will be watching data out of China, where retail sales, investment and industrial production figures due Thursday are expected to show a deepening of the economy’s struggles in November as the Covid Zero restrictions – now relaxed – weighed on activity.

–With help from Vince Golle, Robert Jameson, Malcolm Scott, Craig Stirling, Ott Ummelas and Gregory L. White.

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