24 hour departures ending a year of fighting inflation

(Bloomberg) — The world’s biggest central banks this week will wrap up the most aggressive year for interest rate hikes in four decades, battling inflation even as their economies slow.

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On Wednesday, the US Federal Reserve is set to raise its key interest rate by 50 basis points to 4%-4.5%, the highest since 2007, and hint at more hikes in early 2023.

A day later, the European Central Bank and the Bank of England are likely to follow with half-point moves. Cards in Switzerland, Norway, Mexico, Taiwan, Colombia and the Philippines also have higher borrowing costs.

The year ends very differently than it began. In January, most policymakers admitted they were wrong to bet that inflationary growth would soon fade in 2021, but still assumed they could keep prices under control with steady policy contraction.

On the contrary, numerous indicators show how the acceleration of global inflation to double digits is forcing them to squeeze:

  • Bank of America Corp. has seen gains of about 275 percent this year, enough for each trading day, with just 13 declines.

  • More than 50 central banks once made a rare 75-basis-point hike, some of which they attributed to the Fed multiple times.

  • Bloomberg Economics’ global price index is forecast at the end of the year at 5.2%, up from 2.8% in January.

While there are growing signs that inflation has peaked in most places, the big question now is what will happen in 2023.

At worst, inflation proves stubborn and recessions set in, creating a stagflation nightmare for central banks. The best hope is that consumer price growth slows fast enough that policymakers stop raising rates and consider cutting them to boost growth.

While many investors expect a turnaround at some point, Fed Chairman Jerome Powell and ECB President Christine Lagarde, both of whom will speak this week, say their focus remains on fighting inflation, even if it hurts demand and hiring.

Federal Reserve

While the Fed is expected to begin easing the pace of monetary policy tightening this week with a half-point increase, the target rate for overnight bank lending will continue to be raised in early 2023.

Another 50 basis point hike would be worth 4.25 percentage points of interest rate hikes through 2022, a year when inflation has hit a four-decade high and policymakers are on edge.

Fed officials, who wrapped up a two-day policy meeting on Wednesday, will take a final peak at the key inflation metric on Tuesday when the government releases the November consumer price index. Economists forecast a 0.3% increase in the overall and core measure, excluding food and fuel. Both dimensions are seen to be moderated on an annual basis.

European Central Bank

The ECB is likely to raise interest rates by 50 basis points after euro zone inflation slowed for the first time in 1 1/2 years last month. With consumer price growth still at 10%, a third consecutive 75 basis point move cannot be completely ruled out, and some tighter rate-setters have suggested they would support such a move. The Governing Council’s decision will also be influenced by new quarterly economic forecasts, which are likely to see a slowdown in growth and a rise in inflation forecasts for 2023.

In addition, policymakers are scheduled to decide on the main pillars of their strategy to unload some 5 trillion euros ($5.2 trillion) in debt. The actual process, known as quantitative tightening, or QT, won’t begin until next year, with economists expecting it to begin in the first quarter.

Bank of England

The BOE is expected to raise its key lending rate by half a point to 3.5%, the highest since 2008. With inflation at a 41-year high of 11.1% and consumers expecting higher prices for the next few years, manufacturers, led by Gov. Andrew Bailey, have said they will move hard to stem the wage spiral.

A bleak outlook for the economy makes this month’s decision more difficult than ever. The recession is now underway and is expected to last until 2024, and households are suffering from record cost-of-living pressures. Energy prices are at least six times higher than usual and colder-than-normal weather is sweeping the UK for the first time since last winter.

Swiss National Bank

Switzerland is also dealing with rising inflation, but at 3% – less than a third of that in the surrounding eurozone – SNB policymakers are likely to opt for a half-point move rather than repeat September’s outsized 75 basis point move.

The strong franc – for years a thorn in the side of SNB president Thomas Jordan – is now supporting the economy as it allows Switzerland to avoid imported inflation. The central bank will still reiterate its readiness to intervene in currency markets if needed.

Norges Bank

Norway’s central bank is poised to raise its key interest rate by 25 basis points as last month’s inflation data showed a slowdown in both headline and core price growth. The figures eased speculation about a larger increase in borrowing costs, with some analysts more confident that the December hike would be the last in the cycle.

Other recent data releases, highlighting the bleakest economic picture since the financial crisis, backed up this view, even as Norges Bank’s latest estimates in September showed a peak rate of 3% over the winter, forecasting further quarterly growth early next year.

Mexico and Colombia

The central banks of Mexico and Colombia are bringing down the curtain this week on an unprecedented year for monetary policy in Latin America.

If the week’s two decisions match forecasts, Latin America’s five major inflation-targeting central banks will raise interest rates by a combined 30.75 percentage points in 2022, setting a new annual mark of 40 percent hikes, four pauses and no cuts.

Mexico’s central bank, known as Banxico, is forecast to raise its key interest rate by half a point to 10.50% for the 13th consecutive meeting. While headline inflation has peaked and returned to the 3% target, core indicators remain above 8%. Consensus among analysts pegs Banxico’s terminal rate at 11% after further tightening in early 2023.

On Friday, look for the Banco de la República to raise its key rate to 12% for the third straight 100 basis point hike and the 11th in a row. Economists see this as the end of the hiking cycle, although some analysts put the top 100 basis points higher at 13%.

Elsewhere in the Global Economy

The Hong Kong Monetary Authority will step in with the Fed on the currency floor, meaning another likely hike in interest rates, while the central banks of the Philippines and Taiwan are also expected to hike.

The Bank of Russia is expected to hold rates steady on Friday in its latest round of easing as inflation risks mount. The Kremlin says GDP will fall less than expected this year, but the central bank has warned that new G-7 oil sales restrictions could hit output as early as next year.

In addition to central banking, markets will watch data from China on Thursday, where retail sales, investment and industrial output numbers will show a deepening of the economy’s struggles in November as Covid Zero restrictions are now being eased – affecting activity.

–With assistance from Vince Golle, Robert Jameson, Malcolm Scott, Craig Stirling, Ott Ummelas, and Gregory L. White.

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