📣Fed, BoE and ECB - who will say stop?

This week, three major central banks will raise interest rates again. Will either of them announce the possible end of the tightening process?

Decisions will be announced as follows: Fed at 7:00 pm GMT on Wednesday with press conference at 7:30 pm GMT. The Bank of England will then announce its decision at 12:00 pm  GMT on Thursday with a press conference at 12.30pm GMT. Later on, at 1:15 pm GMT also on Thursday, the ECB decision will be published and the press conference will take place at 1:45 PM GMT.

Current interest rates in Canada, USA, UK and Eurozone. The Bank of Canada was the first of the central banks of developed countries to announce the end of hikes. Will any of the three remaining banks give any signals that the end of rate hikes is approaching during the upcoming meetings? Source: Bloomberg, XTB

Fed decision

Market expectations are clear – the Fed will again reduce the pace of rate hikes to 25 bp. Moreover, the market expects the Fed to raise rates to maximum 5% with the current rate of 4.5%. On the other hand, the Fed has repeatedly communicated that it wants rates above 5% to bring it to a restrictive level. Moreover, recent financial conditions in the US have clearly improved and are not as tight as before, even compared to 2018, when the previous series of hikes took place. Financial conditions in the euro area, on the other hand, are assessed as very restrictive, even despite significantly lower interest rates. The Fed will most likely remain hawkish on February 1, although some signals may emerge that the Fed is approaching the moment of assessing the impact of hikes on the economy. Waller recently pointed out that interest rates will be considered restrictive when they are 1.5-2.0% higher than the inflation expectations, which is expected to reach 3.1% at the end of this year. That would mean the Fed could end the hikes at 5%.

Bank of England

The BoE will most likely raise rates by 50 basis points to 4%, while the market expects a peak of slightly below 4.5%. This would mean a possible slowdown at the next meetings. It is worth remembering that decision makers in the BoE are strongly divided in their opinions and recently as many as two members wanted to keep rates at current levels. This may mean that the interest rate peak is actually very close, even though the labor market is in very good shape. On the other hand, the UK economy may perform quite poorly in the near term.

European Central Bank

Christine Lagarde has made it clear that the bank will support strong rate hikes. The ECB is lagging behind other banks in terms of tightening, so the ECB is likely to remain heavily hawkish at its next meeting, which should benefit the euro. Moreover, recent data point to an acceleration in inflation, although this is due to the cancellation of tax exemptions that took place during the pandemic and strong price increases. EMU GDP remains positive, which will allow the ECB to uphold its hawkish rhetoric. However, it cannot be ruled out that the ECB will announce that after the hike in February and March it will consider limiting further moves. The current ECB deposit rate is 2% and an increase of 50 bps is expected. Lagarde announced in December that we are facing a series of increases at this level.

The British pound performed well against the dollar, but this was mainly due to the weakness of the US currency. On the other hand, EURGBP has been in an uptrend since March last year. We are currently above the midpoint of the consolidation that started in 2016, but most likely the UK's economic problems will cause further problems for the pound, so another upward impulse towards the 0.90 level cannot be ruled out. Source: xStation5