We are approaching the end of the year and while citizens are preparing to celebrate Christmas and the start of the new year, central banks remain busy. In the coming week, in fact, all three major Western central banks: the Fedthe European Central Bank (BCE) and the Bank of England (BoE), will announce their monetary policy decisions, the last moves of 2022.
From this point of view, the consensus of analysts collected by Bloomberg estimates that all three central banks will raise key rates by 50 basis points, but the reasons for this choice differ from one case to anotherlet’s see which ones.
Fed: ready to take the rate above 4%
In recent weeks we have had numerous statements from various members of the American board and the result of these interventions shows that a 50 basis point rate hike is increasingly probable in the next FOMC meeting scheduled for December 13-14well below previous increases of 75 basis points.
However, according to Christian Scherrmann, US economist from DWS, a 50 basis point hike should not be seen as a shift by the Fed towards a more dovish monetary policy stance. Indeed, inflation remains too high and the labor market is still too strong, with supply and demand too unbalanced, all elements that would prevent the Fed from letting its guard down.
In particular, for the Fed these remain the main factors to monitor: theinflation that although it has slowed down in the latest surveys, it remains at an extremely high level, +7.7%; but above all the maintenance of the labor market which reveals that there are still 1.6 job vacancies for every unemployed person and this means that demand for labor remains strong, with wages rising by more than 5% a year. As Christian Scherrmann observes “this is a far from encouraging configuration for the US economy”.
A minor rally does not indicate a dovish Fed
The Fed’s goal is to tame inflation while harming the economy and society as little as possible, but this fight will have its costs and according to the analyst at DWS “the Fed’s economic projections at its upcoming December meeting will reflect these costs, as well as a willingness to accept lower growth and higher interest rates in 2023.”.
In this sense, the Fed dot-plot, i.e. the forecasts of the various members of the American central bank on the trajectory of US interest rates, according to DWS analysts will most likely show a peak rate slightly above 5.0%while next year’s economic growth could be downgraded to less than 0.5%, just short of the recession forecast.
From this point of view, according to the DWS analyst “staying hawkish in the face of a slight dip in inflation could serve several purposes, indeed, if interest rates remain high through 2023, it could ensure that inflation remains low in subsequent years..
For this reason, only in 2024 FOMC members will likely indicate their expectations of monetary policy normalization and at that point interest rate cuts are likely to be expected.
Investors therefore shouldn’t get too excited about the minor hikes at the next meeting, in fact, this does not indicate that the Fed will start easing policy to help growth or that it is reverting to the so-called “Fed put”.
ECB: expected increase of 50 basis points
The European Central Bank is also likely to move in the direction of a rate hike at its meeting on Thursday 15 December, but after the recent two 75 basis point hikes in key interest rates, DWS analysts are they wait for all the key interest rates to come in December only increased by 50 basis points.
From this point of view, Ulrike Kastens, Economist Europe of DWS, expects that from the second quarter of 2023 “reinvestments from the asset purchase program (APP) are reduced by 50%, but the impact on the ECB’s balance sheet is likely to be quite small, as we expect neither active bond sales nor changes to the Pandemic Emergency Purchase Program (PEPP), whose reinvestments represent a backstop in case of market stress and last until at least the end of 2024”.
Also, in December the ECB will present its growth and inflation projections up to 2025 for the first time. In this sense, “despite weakening growth, inflation in 2023 and 2024 will be well above the ECB’s inflation target and this requires a tightening monetary policy stance, which we believe will require further interest rate hikes of 100 basis points in the coming months”, commenta Ulrike Kastens.
UK already in recession, BoE to increase by 50 bp
The Bank of England (BoE) will also meet on 15 December and analysts are expecting a 50 basis point hike. In England currently the inflation rate is 11.1% per annumwell above that of the euro area and the United States, with price pressures widely spread across all categories of the consumption basket.
This situation is also reflected in the high number of strikes, with employees who don’t want to settle for wage increases below the rate of inflation. At the same time, as Katrin Loehken, UK economist at DWS warns, “il UK is already in a recessionas falling real incomes depress domestic demand and earlier increases in key interest rates have repercussions on the economy”. At the same time, the housing market is cooling rapidly and inflation expectations appear to have at least stabilised.