This week will usher in the super central bank week starting from Tuesday. From the Federal Reserve to the Bank of England to other non-mainstream central banks will hold policy meetings one after another. The governors of major central banks need to make a key decision in the next few days: financial stability should be maintained Or is the price stable?
Federal Reserve Chairman Jerome Powell will set the tone on Wednesday, when the central bank weighs whether the banking turmoil that has erupted in two weeks is so worrisome that it should forego raising interest rates. More than a dozen central banks, including the UK, Switzerland and Norway, will also announce interest rate decisions this week. While the ECB opted to pull the trigger last Thursday, raising rates by 50 basis points, the Credit Suisse (CS.US) debacle has created new problems for policymakers.
On the one hand, maintaining financial stability by keeping interest rates on hold may convince investors that regulators will do everything they can to ensure that the contagion risk from the failure of three US banks and now Credit Suisse is contained. But the problem is that well-above-target inflation remains stubborn, and Powell and his colleagues are well aware of the history of the 1970s, when insufficient austerity measures fueled big price increases.
Diane Swonk, chief economist at KPMG, said: “Financial crises tend to be intermittent, and we are far from fully resolved this crisis. For the Fed, given the uncertainty about the degree of credit market tightening, we are looking for A significant pause in rate hikes.” Swonk had predicted earlier this month that the Fed would announce a 50 basis point rate hike on March 22 local time, a shift that signaled a sharp change in market conditions.
As a result, central banks face a “choice between a ‘dove hike’ and a ‘hawk pause’,” Geoffrey Yu, senior market strategist at BNY Mellon, wrote in a note on Monday.
In other words, policymakers can raise interest rates further while assuring the public that they understand the risks to the banking system and will act appropriately to avoid a broader collapse. Alternatively, they could stand on hold for now to buy time to watch financial developments, while pledging to quickly resume the fight against inflation once the pressure on banks subsides.
The futures market shows that the Fed will announce a 25 basis point interest rate hike on Wednesday local time. Markets are now pricing in a 75.3% chance the Fed will raise interest rates by 25 basis points on Wednesday, and a 24.7% chance it will choose to pause, according to the CME “FedWatch Tool.”
For the Bank of England, which began raising interest rates months before the Fed, there is less than a 50% chance of a rate hike on Thursday, and the Swiss National Bank must also make a decision on Thursday, just days after the Swiss bank was involved in brokering Acquisition of Credit Suisse by UBS.
Second, no matter what the major central banks do this week, the market believes that they are much closer to ending the tightening cycle than they were expected a few days ago.
For the Fed, before the problems at Silicon Valley Bank escalated, traders were betting on a 110 basis point increase in interest rates, which would imply rates as high as nearly 6%. At present, the market expects that interest rates will only rise by another 35 basis points; the market currently expects the peak of the Fed’s interest rate to reach 5.25%, but overall, the market generally bets that the Fed will end the rate hike after raising interest rates by 25 basis points on Wednesday. And looking further, the market is also widely betting that the Fed will cut interest rates by 75 basis points by the end of the year.
It was a similar story in Europe, where traders cut their final ECB rate forecast by a full percentage point to 3.2%. Markets now expect the BoE to raise interest rates to as much as 4.25%, from 5% previously.
A decidedly dovish outlook also helped fuel a strong rally in bond markets. The 2-year German and U.S. government bond yields, the most sensitive to monetary policy, have fallen by 100 basis points or more since March 8.
However, central banks are likely to take different decisions. In Switzerland, economists forecast a 50 basis point rate hike to 1.5% as the SNB catches up with its neighbor the euro zone in its first decision in 2023. Still, inflation in Switzerland is 3.4%, which is low compared to many developed countries.
A day before the BoE decision, official February CPI data due on Wednesday is expected to show inflation slowing to 9.9% from 10.1%; this could also be a factor in the BoE’s policy path.
ECB President Christine Lagarde insisted last week after raising interest rates by 50 basis points that price stability and financial stability were “two different kinds of stability addressed by different instruments”.
But raising interest rates has been blamed as one of the reasons for the current banking crisis. “Near-term economic momentum and inflation have been overshadowed by risks to the banking system, significantly re-pricing the Fed’s path,” Bank of America rates strategist Mark Cabana said in a note.
This article is forwarded by “Huitong Finance” authorized by Zhitong Finance