The world’s big central banks are set to enter into a new phase of lower interest rate rises this week as inflation eases down from its peak.
But, spurred by fears that inflation in the US, Europe and the UK remain well above target, monetary policymakers are signalling they are still planning to continue raising rates to bring inflation back to its pre-pandemic levels.
And, while this week’s expected rate rises of 0.5 per cent in all three regions are below recent increases of 0.75 per cent, they will be bigger than the rate increments carried out by the US, Europe and the UK central banks before this year’s inflation surge.
Silvia Ardagna, chief European economist at Barclays Bank, said: “Inflation is decelerating and the pace of rate rises is smaller, but central banks are still going to be hiking by larger amounts than [the 0.25 percentage points we have been used to] historically.”
The US headline figure out on Tuesday is expected to show a slowdown to 7.3 per cent in November, from 7.7 per cent in the previous month and way below the June peak of 9.1 per cent. In the UK, data out on Wednesday is expected to show headline CPI inflation slowing to 10.9 per cent in November from a 41-year high of 11.1 per cent in the previous month.
Jennifer McKeown, chief global economist at Capital Economics, said that while inflation was likely to fall “much lower” over the course of next year, there were big question marks as to whether price pressures would moderate in line with central banks’ targets of about 2 per cent.
In the eurozone, core inflation — which excludes changes in the price of energy, food and tobacco — remained at an all-time high of 5 per cent in November. In the US, the core measure dipped by only 0.3 percentage points to 6.3 per cent in November, from a 40-year high in the previous month.
Nathan Sheets, global chief economist of Citi, said persistent inflation in the services sector, combined with sustained, albeit slower, rate rises and rolling recession, would be “the bad news for next year”.
Maintaining monetary tightening is set to prove more and more of a communications challenge for central bankers as economies on both sides of the Atlantic shrink — partly because of the jumbo rate rises that central banks have made over the course of 2022.
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Officials now appear more attuned to the risks associated with squeezing the economy too forcefully. Jay Powell, the chair, has said that while the Federal Reserve will do what is necessary to bring inflation back down to its longstanding 2 per cent target, the central bank does not want to damp demand excessively and drive the US economy into recession.
“My colleagues and I do not want to overtighten,” he said at an event hosted by the Brookings Institution think-tank at the end of last month.
But the danger that inflation might cease falling at far higher levels than 2 per cent will lead the Fed to lift its benchmark policy rate by half a percentage point on Wednesday.
The decision, which will raise the federal funds rate to a target range of 4.25 per cent to 4.5 per cent, comes after four straight rises of 0.75 percentage points.
Investors betting that the Fed could cut rates in 2023 are likely to have those hopes dashed, despite the slowdown in the pace of rate rises. Fed officials have signalled that rates will remain at “elevated levels” for the duration of next year.
Other major central banks, including the Bank of England and the European Central Bank, are also expected to slow the pace of their rate rises later this week — while remaining serious about bringing inflation under control.
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The BoE on Thursday is set to raise interest rates by 0.5 percentage points to 3.5 per cent, signalling the battle against price and wage rises is not yet complete.
Several members of the ECB governing council have said in recent weeks they expect to settle on a 0.5 percentage point rise on Thursday, not least because the bloc’s economy is on the brink of recession and policy rates are already at their highest level since the 2008 financial crisis.
The decision follows two consecutive 0.75 point increases that have taken its deposit rate to 1.5 per cent.
Observers also expect ECB president Christine Lagarde to push back against the idea that interest rates will remain at the 2 per cent level they are likely to hit this week. “Next week’s step-down to 50 basis points is likely to be paired with a clear message that the tightening job is not done yet,” said Sven Jari Stehn, chief European economist at Goldman Sachs.
Source: Economy - ft.com
