Year of fighting inflation set to end with 24 hours of interest-rate hikes
ECB president Christine Lagarde say the focus remains on tackling inflation, even if doing so hurts demand and hiring.
The world’s biggest central banks will this week wrap up the most aggressive year for interest-rate hikes in four decades with their fight against inflation still not over even as their economies slow.
The US Federal Reserve is set to raise its key rate by 50 basis points on Wednesday to a range of 4% to 4.5%, the highest since 2007, and to signal more increases in early 2023.
A day later, the European Central Bank (ECB) and the Bank of England are likely to follow with half-point moves. And higher borrowing costs are also on the cards in Switzerland, Norway, Mexico, Taiwan, Colombia, and the Philippines.
The year ends much differently than it started. Back in January, most policymakers acknowledged they were wrong to have bet 2021’s inflation surge would soon fade, but still assuming they could restrain prices with a steady constriction of policy.
Instead, multiple metrics show how an acceleration in global inflation to around double-digits forced them to squeeze hard, with more than 50 central banks executing once-rare 75 basis-point increases, with some, including the ECB, doing so repeatedly.
Although signs are mounting that inflation has peaked in most places, the big question now is what happens in 2023.
The worst case is inflation proves stubborn and recessions begin, creating a stagflationary nightmare for central banks.
The best hope is that consumer-price growth retreats fast enough to enable policymakers to stop jacking up rates and consider reducing them to boost growth.
While many investors expect a pivot at some point, Fed chairman Jerome Powell and ECB president Christine Lagarde, both of whom will speak this week, say their focus remains on tackling inflation, even if doing so hurts demand and hiring.
The ECB will probably hike rates by 50 basis points after inflation in the euro area slowed last month for the first time in 18 months. Yet with consumer price growth still at 10%, a third consecutive 75 basis-point move cannot be completely ruled out and some of the more hawkish rate-setters have suggested they’d back such a step.
The Governing Council’s decision will also be influenced by new quarterly economic forecasts, which will likely see a downgrade in growth and an upgrade in inflation projections for 2023.
Additionally, policymakers are scheduled to decide on the key pillars of their strategy to unwind debt of nearly €5 trillion. The actual process — known as quantitative tightening or QT — will not start until next year, with economists expecting it to kick off in the first quarter.
While the Fed is expected to begin tempering the pace of monetary policy tightening this week with a half-point hike, the target rate for overnight bank lending will continue to be lifted in early 2023.
Another 50-basis-point boost would amount to 4.25 percentage points worth of interest-rate increases over 2022, a year that saw inflation soar to a four-decade high and left policymakers scrambling.
Fed officials, who conclude their two-day policy meeting Wednesday, will get one final peak at a key inflation metric on Tuesday when the November consumer price index is issued. Economists project 0.3% increases in the overall and core measure that excludes food and fuel. On an annual basis, both gauges are seen to be moderating.
The BOE is widely expected to boost its benchmark lending rate by a half point to 3.5%, which would be the highest since 2008. With inflation at a 41-year high of 11.1% and consumers increasingly expecting elevated prices for the next few years, policymakers led by governor Andrew Bailey have said they will act forcefully to prevent a wage-price spiral.
A darkening outlook for the UK economy makes this month’s decision more difficult than the last. A recession is now under way and expected to last into 2024, and households are suffering from the tightest cost-of-living squeeze on record.
Energy prices are at least six times higher than usual, and colder-than-normal weather is buffeting the UK for the first time since last winter.
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