Given the significant new rate hikes that have yet to be assimilated, growth will likely be hurt in 2023.
Global central banks have begun to ease their frenetic pace of monetary policy tightening, but that shouldn’t be seen as another sign of easing. With rates set to continue to rise in 2023, it is no longer the pace of tightening that is of primary concern to investors, but where global policy rates will go and how long central banks will hold them.
After raising rates by 75 basis points (bps) in recent meetings, the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) only raised rates by 50 pb each in December. However, this does not bode for a less restrictive stance, given that the three central banks have pledged to continue raising rates.
The latest inflation figures have reinforced the impression that price pressure is easing. Yet, with the Fed expecting PCE (“personal consumer spending”) inflation to decline just 3.1% by the end of 2023, with the BoE forecasting inflation of 5.2% and the ECB by 6.3%, further tightening is clearly needed.
Indeed, according to the latest Fed chart, key rates are expected to rise another 75 bps to 5.1% next year and remain at that level throughout 2023. Although neither the ECB nor the BoE does not release rate projections, markets expect policy rates to rise another 125bps in the Eurozone and 100bps in the UK, and expect no rate cuts in 2023.
Given the significant monetary tightening that remains to be assimilated, growth will probably be damaged in 2023: the BoE forecasts a recession next year, while the Fed and the ECB forecast growth of only +0.5%. Although the outlook seems daunting, the opportunities will exist. Despite the lack of rate cuts, traditional fixed income securities, with bond yields at their highest level in a decade and rising recession risk, finally offer attractive investment prospects.
