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The world’s biggest central banks will this week wrap up the most
aggressive year for interest-rate hikes in four decades with their fight
against inflation still not over even as their economies slow.
The
US Federal Reserve on Wednesday is set to raise its key rate by 50
basis points to a range of 4% to 4.5%, the highest since 2007, and to
signal more increases in early 2023.
A day later, the European
Central Bank and the Bank of England are likely to follow with
half-point moves. And higher borrowing costs are also in the cards in
Switzerland, Norway, Mexico, Taiwan, Colombia and the Philippines.
The
year ends much differently than it started. Back in January, most
policymakers were acknowledging they were wrong to have bet 2021’s
inflation surge would soon fade, but still assuming they could restrain
prices with a steady constriction of policy.
Instead, multiple metrics show how an acceleration in global inflation to around double-digits forced them to squeeze hard:
Bank of America Corp. has spotted around 275 rate hikes this year, enough for one every trading day, with just 13 cuts
More than 50 central banks have executed once-rare 75 basis-point increases, some joining the Fed in doing so repeatedly
A Bloomberg Economics gauge of global rates is projected ending the year at 5.2%, up from 2.8% in January
Although signs are mounting that inflation has peaked in most places, the big question now is what happens in 2023.
The
worst case is inflation proves stubborn and recessions begin, creating a
stagflationary nightmare for central banks. The best hope is
consumer-price growth retreats fast enough to enable policymakers to
stop jacking up rates and consider reducing them to boost growth.
While
many investors expect a pivot at some point, Fed Chair Jerome Powell
and ECB President Christine Lagarde, both of whom will speak this week,
say their focus remains on tackling inflation even if doing so hurts
demand and hiring.
Federal Reserve
While
the Fed is expected to begin tempering the pace of monetary policy
tightening this week with a half-point hike, the target rate for
overnight bank lending will continue to be lifted in early 2023.
Another
50 basis point boost would amount to 4.25 percentage points worth of
interest-rate increases over 2022, a year that saw inflation soar to a
four-decade high and left policy makers scrambling.
Fed officials,
who conclude their two-day policy meeting Wednesday, will get one final
peak at a key inflation metric when the government on Tuesday issues
the November consumer price index. Economists project 0.3% increases in
the overall and core measure that excludes food and fuel. On an annual
basis, both gauges are seen moderating.
European Central Bank
The
ECB will probably hike rates by 50 basis points, after inflation in the
euro area slowed for the first time in 1 1/2 years last month. Yet with
consumer-price growth still at 10%, a third consecutive 75 basis-point
move can’t be completely excluded and some of the more hawkish rate
setters have suggested they’d back such a step. The Governing Council’s
decision will also be influenced by new quarterly economic forecasts,
which will likely see a downgrade in growth and upgrade in inflation
projections for 2023.
Additionally, policymakers are scheduled to
decide on the key pillars of their strategy to unwind debt of nearly €5
trillion ($5.2 trillion). The actual process — known as quantitative
tightening or QT — won’t start until next year, with economists
expecting it to kick off in the first quarter.
Bank of England
The
BOE is widely expected to boost its benchmark lending rate a half point
to 3.5%, which would be the highest since 2008. With inflation at a
41-year high of 11.1% and consumers increasingly expecting elevated
prices for the next few years, policy makers led by Governor Andrew
Bailey have said they will act forcefully to prevent a wage-price
spiral.
A darkening outlook for the economy makes this month’s
decision more difficult than the last. A recession is now underway and
expected to last into 2024, and households are suffering from the
tightest cost-of-living squeeze on record. Energy prices are at least
six times higher than usual, and colder-than-normal weather is buffeting
the UK for the first time since last winter.
Swiss National Bank
Switzerland
is also dealing with soaring inflation, yet at 3% — less than a third
of that in the surrounding euro area — SNB policymakers will likely opt
for a half-point move instead of repeating September’s oversized 75
basis-point step.
The strong franc — for years a thorn in the side
of SNB President Thomas Jordan — is now supporting the economy as it
allows the Swiss to avoid imported inflation. The central bank is still
likely to reiterate that it’s willing to intervene in currency markets
if needed.
Norges Bank
Norway’s
central bank set to raise its key rate by 25 basis points as inflation
data for last month showed a slowdown in both headline and underlying
price growth. Those numbers have allowed speculation about bigger
increases in borrowing costs to retreat, with some analysts becoming
more convinced that the December hike will be the last in the cycle.
Other
recent data releases highlighting the gloomiest economic outlook since
the financial crisis have also underpinned that view, even as Norges
Bank’s latest estimates from September indicate a peak rate of 3% over
the course of winter, projecting an additional quarter point hike early
next year.
Mexico & Colombia
The
central banks of Mexico and Colombia this week bring the curtain down
on an unprecedented year for monetary policy in Latin America.
Should
the week’s two decisions line up with forecasts, Latin America’s big
five inflation targeting central banks will have raised rates by a
cumulative 30.75 percentage points in 2022, setting a new annual mark by
way of 40 rate hikes, four pauses and no cuts.
Mexico’s central
bank, known as Banxico, is forecast 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 to the 3% target, core readings
remain over 8%. The consensus among analysts has Banxico’s terminal
rate at 11% after additional tightening in early 2023.
On Friday,
look for Banco de la República to deliver a third straight 100
basis-point hike and 11th straight overall to put the key rate at 12%.
Economists see this as the end of the hiking cycle though some analysts
put the top 100 basis points higher at 13%.
Elsewhere in the Global Economy
The
Hong Kong Monetary Authority will move in lockstep with the Fed, due to
the currency peg, meaning another likely increase in rates, while
central banks in the Philippines and Taiwan are also predicted to hike.
The
Bank of Russia is expected to hold rates steady on Friday, with its
latest round of easing ending as inflation risks grow. The Kremlin is
touting the smaller-than-expected GDP contraction this year, but the
central bank has warned that new G-7 restrictions on oil sales could hit
output as they kick in next year.
Beyond central banking, markets
will be watching data out of China, where retail sales, investment and
industrial output numbers due Thursday are set to show a deepening in
the economy’s struggles in November as Covid Zero restrictions — now
being eased — weighed on activity.
--With assistance from Vince Golle, Robert Jameson, Malcolm Scott, Craig Stirling, Ott Ummelas and Gregory L. White.
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