Rising Rates

World Markets

It’s set to be an action-packed week as three of the world’s largest central banks hold policy meetings. While the Federal Reserve is expected to slow the pace of interest rate hikes, the European Central Bank and the Bank of England are both expected to hike rates by 50-basis points.

GBP: The BOE, the first of the major central banks to begin hiking rates, is expected to deliver its tenth rate hike since December 2021 on Thursday. Officials are widely expected to raise rates by 50-basis points to 4%. Headline inflation moderated in December to 10.5%, but it’s still over five times the Bank’s official target and wage growth remains persistently high. Ultimately, market watchers will be looking out for indications of whether policymakers think they are near the end of their tightening cycle. Moreover, money markets are currently expecting one final 25-basis point hike in March, which would take the Bank Rate to a peak of 4.25%.

EUR: A rate hike of 50-basis points to 3% from the ECB when it meets on Thursday looks like a done deal – but what happens next remains unclear. Market watchers will be on the lookout for indications of how much further and how fast officials intend to go. ECB President Christine Lagarde will likely remain hawkish as core inflation remains stubbornly high, despite growing dissent among policymakers, with more dovish voices arguing that inflation has retreated from record highs. Policy hawks are pushing for more of the same in March, with inflation still well above the ECB’s 2% target.

USD: The dollar distanced itself from an eight-month through, ahead of a slew of central bank meetings this week, though gains were capped by dovish repricing of the U.S. Federal Reserve’s rate-hike expectations as compared to more hawkish counterparts. Market watchers are widely expecting a 25-basis point rate increase on Wednesday to a range of 4.5% to 4.75%, slowing the size of the increase for a second consecutive meeting. Furthermore, investors will be closely watching Fed Chair Jerome Powell’s post policy meeting press conference for any indications of how much higher rates will rise and when officials might consider a pause.