The 24 Hours of Hikes That End Year of Fighting Inflation

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(Bloomberg) — 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.

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The US Federal Reserve on Wednesday is set to raise its key rate by 50 basis points to a range of 4% to 4.5%, the highest since 2007, and to signal more increases in early 2023.

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

The year ends much differently than it started. Back in January, most policymakers were acknowledging 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:

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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 consumer-price growth retreats fast enough to enable policymakers to stop jacking up rates and consider reducing them to boost growth. 

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While many investors expect a pivot at some point, Fed Chair 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.

Federal Reserve

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 policy makers scrambling.

Fed officials, who conclude their two-day policy meeting Wednesday, will get one final peak at a key inflation metric when the government on Tuesday issues the November consumer price index. Economists project 0.3% increases in the overall and core measure that excludes food and fuel. On an annual basis, both gauges are seen moderating.

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European Central Bank

The ECB will probably hike rates by 50 basis points, after inflation in the euro area slowed for the first time in 1 1/2 years last month. Yet with consumer-price growth still at 10%, a third consecutive 75 basis-point move can’t be completely excluded 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 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 ($5.2 trillion). The actual process — known as quantitative tightening or QT — won’t start until next year, with economists expecting it to kick off in the first quarter. 

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Bank of England

The BOE is widely expected to boost its benchmark lending rate 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, policy makers led by Governor Andrew Bailey have said they will act forcefully to prevent a wage-price spiral.

A darkening outlook for the economy makes this month’s decision more difficult than the last. A recession is now underway 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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Swiss National Bank 

Switzerland is also dealing with soaring inflation, yet at 3% — less than a third of that in the surrounding euro area — SNB policymakers will likely opt for a half-point move instead of repeating September’s oversized 75 basis-point step.

The strong franc — for years a thorn in the side of SNB President Thomas Jordan — is now supporting the economy as it allows the Swiss to avoid imported inflation. The central bank is still likely to reiterate that it’s willing to intervene in currency markets if needed.

Norges Bank

Norway’s central bank set to raise its key rate by 25 basis points as inflation data for last month showed a slowdown in both headline and underlying price growth. Those numbers have allowed speculation about bigger increases in borrowing costs to retreat, with some analysts becoming more convinced that the December hike will be the last in the cycle. 

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Other recent data releases highlighting the gloomiest economic outlook since the financial crisis have also underpinned that view, even as Norges Bank’s latest estimates from September indicate a peak rate of 3% over the course of winter, projecting an additional quarter point hike early next year.

Mexico & Colombia

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

Should the week’s two decisions line up with forecasts, Latin America’s big five inflation targeting central banks will have raised rates by a cumulative 30.75 percentage points in 2022, setting a new annual mark by way of 40 rate hikes, four pauses and no cuts.

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Mexico’s central bank, known as Banxico, is forecast to raise its key rate for a 13th straight meeting to 10.50% with a half-point hike. While headline inflation has peaked and is heading back to the 3% target, core readings remain over 8%. The consensus among analysts has Banxico’s terminal rate at 11% after additional tightening in early 2023.

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

Elsewhere in the Global Economy

The Hong Kong Monetary Authority will move in lockstep with the Fed, due to the currency peg, meaning another likely increase in rates, while central banks in the Philippines and Taiwan are also predicted to hike.

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The Bank of Russia is expected to hold rates steady on Friday, with its latest round of easing ending as inflation risks grow. The Kremlin is touting the smaller-than-expected GDP contraction this year, but the central bank has warned that new G-7 restrictions on oil sales could hit output as they kick in next year.

Beyond central banking, markets will be watching data out of China, where retail sales, investment and industrial output numbers due Thursday are set to show a deepening in the economy’s struggles in November as Covid Zero restrictions — now being eased — weighed on activity.

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