The December FOMC meeting is the marquee event this week, but Jerome Powell won’t be alone in hiking rates.
Just hours after the Fed caps a dramatic year for US monetary policy with what’s widely expected to be a 50bps move, both the Bank of England and the ECB will raise rates, likely by the same amount.
In the UK, the situation borders on hopeless. Inflation is quintuple the BoE’s target (figure below) and economic projections released in conjunction with last month’s 75bps hike suggested the next two years will be unimaginably cruel on the macro front.
The UK is staring down a guaranteed recession, and although Rishi Sunak’s ascension to prime minister helped short circuit what might’ve been an outright financial meltdown, the Tories, just three years removed from the largest majority in a generation, are facing an existential crisis.
Suffice to say the combination of unfathomable incompetence (i.e., Liz Truss) and brutal stagflation isn’t popular with voters.
November’s hike from the BoE was the largest since 1989 and there’s some scope for an encore, although market pricing overwhelmingly favors a 50bps increase.
The data docket in the UK this week includes GDP, a jobs report and inflation. I suppose you could argue that’s a good thing — it means the BoE will have plenty of “fresh” information on hand. But it’ll make for a dizzying stretch for traders and could pretty easily complicate and already fraught decision calculus. Analysts expect a three- and possibly even a four-way vote split from the MPC.
Recall that Andrew Bailey was very explicit last month in pushing back on market pricing for the ultimate destination of Bank Rate. Indeed, the policy statement itself said rates would likely peak “lower than priced into financial markets.”
“At the time the statement was made, the terminal rate was roughly where it is today, though it had been closer to 5% in the days prior and the MPC’s forecasts,” TD said, previewing this week’s meeting. “Given terminal pricing has not really moved down since the November meeting, we expect the MPC to maintain this language in the December Policy Summary.”
The figure (above) gives you some context for how markets are currently pricing the rates trajectory for the BoE, the Fed and the ECB.
“The BoE will formally account for the lower fiscal support announced at the Autumn budget statement, as well as the continued upside surprises in inflation and wage data,” Goldman remarked, on the way to suggesting that the bank will likely “emphasize the downside risks to growth, and give relatively non-committal guidance to further hikes.”
The ECB’s job isn’t much easier than the BoE’s, if it’s any easier at all. Inflation did recede for the first time in a long time last month (figure below), but you have to squint to see the improvement.
You wouldn’t know it from the chart, but the red dot actually represents one of the largest month-to-month declines in the annual rate of headline inflation in a decade.
Of course, it scarcely matters. Inflation in Europe is hostage to the war, and if anything, escalations in Ukraine seem more likely than deescalations. Vladimir Putin sounds more desperate by the week, and a desperate despot is a dangerous despot (all despots are dangerous, but this one is heavily armed and might’ve lost his grip on reality several years ago).
The ECB is coming off two straight 75bps hikes, which would’ve sounded positively ludicrous to policymakers had you suggested it a year ago. All in all, Christine Lagarde has delivered 200bps of hikes over just three meetings, a stunning feat in the context of the ECB, but an achievement that some (myself included) worry is largely symbolic. Although the bank can surely exacerbate a bloc-wide economic downturn, it’s far from obvious that monetary policy is anything other than a sideshow in Europe, where everything hinges on food and energy costs.
The bank will also release a new set of economic projections. I’ll eschew bad jokes in favor of dryly noting that the market isn’t likely to put much faith in the new forecasts.
What will be of interest to markets, though, are any details about the ECB’s plans to unwind its balance sheet. In July, the bank unveiled an “anti-fragmentation” tool aimed at ensuring any undue stress in periphery bonds during the normalization process doesn’t impair the transmission of monetary policy or otherwise threaten what counts as cohesion in the fractious bloc.
Passive runoff (versus active sales) will plainly be the preference. There’s some debate over whether caps will be appropriate, and the specter of the UK’s October gilt calamity is a reminder of what can go wrong. The ECB owns all manner of different fixed income securities purchased across multiple programs. The idea that they’ll succeed in unwinding any meaningful portion of that without stepping on a figurative land mine somewhere seems far-fetched, but maybe I’m just a pessimist.
Also on deck: The SNB (which has been active this year) and the Norges Bank (which may end its hiking cycle 15 months after becoming the first central bank to raise rates in the pandemic era among countries with the 10 most-traded currencies).
All told, the Fed, the BoE, the ECB, the SNB and the Norges Bank will likely dial up 225bps of hikes this week. (There are other decisions due, but they’re from emerging markets.)
