The tightening fiscal and monetary policy it pursued was reversed central banks on global markets negatively following raising US Federal Reserve The European Central Bank, the Bank of England, and then the Swiss National Bank interest rates By 50 basis points this week, in line with expectations and the markets reacted negatively, following last Wednesday the Federal Reserve raised the benchmark interest rate by 50 basis points to its highest level in 15 years. This was a slowdown from the previous four meetings, as the central bank implemented a 75 basis point increase.
However, Fed Chairman Jerome Powell noted that “despite recent indications that inflation may have peaked, the struggle to return it to manageable levels is far from over.”
Powell said during a press conference, last Wednesday, “There is a real expectation that service inflation will not decrease so quickly, so we will have to stay there,” adding, “We may have to raise interest rates to get to where we want to go.”
24 hours following the Fed’s decision, the European Central Bank followed suit and also opted for a lower hike but indicates that it will need to raise interest rates significantly more to tame inflation. Inflationary pressures appear more persistent.
Fiscal tightening continues
“Major central banks have given markets a clear message that financial conditions must remain tight,” George Saravelos, head of forex research at Deutsche Bank, told CNBC, adding that “following central banks have achieved this, the theme of 2023 is different, which is to prevent the market from doing the opposite,” and noting that “buying risky assets on the basis of weak inflation is a contradiction in terms, as the easing of financial conditions that entails undermines the argument for weakening inflation.”
Saravelos said, “The clear shift of focus by the ECB and the Federal Reserve from the Consumer Price Index (CPI) to the labor market is notable because it suggests that supply-side movements in commodities are not enough to signal mission accomplished.”
“The overall message for 2023 seems clear: central banks will push riskier assets until the job market starts to turn around,” Saravelos concluded.
militant messages
The hawkish messages from the Federal Reserve and the European Central Bank somewhat surprised the market, although the policy decisions themselves were in line with expectations.
On Friday, Holger Schmieding, the chief economist at the German “Berenberg” Bank, from the private sector, adjusted his expectations for the final interest rate according to developments that occurred in the last 48 hours, noting that “any additional increase in the interest rate by 25 basis points for the Federal Reserve in 2023 may It raises inflation to a peak up to a range between 5 percent and 5.25 percent over the period according to its first three meetings in the year,” adding, “We still believe that inflation will drop to 3 percent and the unemployment rate will rise to more than 4.5 percent by the end of the year.” In 2023, they will eventually lead to a shift to a less restrictive position, but at the present time it is clear that the Federal Reserve intends to raise interest.” restrictive” at a steady pace for more than one upcoming meeting.
Funding rate goes up
Berenberg Bank said that “an additional move in interest rates by 50 basis points in March 2023 might raise the main refinancing rate of the European Central Bank to 3.5 percent.”
“From this high level, it is likely that the European Central Bank will need to cut interest rates once more once inflation drops to close to 2 percent in 2024,” Schmieding said, adding, “We are now looking for two cuts of 25 basis points each in the future.” mid-2024, leaving our call for the ECB’s main refinancing rate at the end of 2024 unchanged at 3.0 percent.”
As for the Bank of England, it was more dovish than the Federal Reserve and the European Central Bank, as future decisions are likely to depend heavily on how the expected recession in the United Kingdom unfolds. .
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On the directions of the British Bank, Berenberg Bank expected an additional increase of 25 basis points in February 2023 to raise the bank interest rate to a peak of 3.75 percent, with cuts of 50 basis points in the second half of 2023 and another 25 basis points by the end of 2024. Schmieding explained, “But once morest the backdrop of positive surprises in recent economic data, an additional increase in interest rates by 25 basis points from the Federal Reserve and the Bank of England does not make a fundamental difference in our economic outlook,” saying that “we still expect the US economy to contract by 2 percent.” 0.1% in 2023, followed by growth of 1.2% in 2024, while the UK is likely to suffer a recession with a 1.1% drop in GDP in 2023, followed by a recovery of 1.8% in 2024.
winter stagnation
For the ECB, the Deutsche Bank sees an additional 50 basis points expected to have a pronounced impact, clearly limiting growth in late 2023 and early 2024.
And regarding that, Schmieding said, “While we leave the real GDP demand for next year unchanged (at -0.3 percent), we reduce our call for the pace of economic recovery in 2024 from 2.0 percent to 1.8 percent,” noting that “within a year 2022 Central banks’ forward guidance and shifts in tone have not proven to be reliable evidence of future policy actions.”
The bank continued, “The risks to our new Fed and BoE forecasts are balanced in both directions but given that the winter recession in the eurozone is likely to be deeper than the ECB’s projects and since inflation is likely to decline significantly from March onwards, we see A good chance that the ECB’s final rate hike in March 2023 will be 25 basis points instead of 50.”
