Interest rate raises are certain in the coming week from the Bank of England, US Federal Reserve and European Central Bank, with speculation alive about not only the size of the three hikes and the tone of guidance about coming months.
Up first is the Fed, on the first day of the new month, after recent declines in inflation have increased the probability of a further reduction in the size of the US central bank’s rate hikes to 25bps in February from 50 bps in December.
Based on the fading momentum of inflation, the FOMC is likely to press pause after this, said Philip Marey, Rabobank’s senior US strategist.
“Given the long and variable lags of monetary policy, the decline in inflation, and the weakening economy, we think that after a second 25 bps hike in March it is time to keep policy rates constant and assess the impact of the hiking cycle so far.
“If the loss of momentum in inflation continues in the coming months, a rate hike by May 2 looks overdone in our view.”
A contrasting view is that Fed head Jerome Powell is “likely” to hint at the significant chance of another rate hike ahead, said Nikko AM's chief global strategist John Vail.
“The Fed is likely watching gasoline prices rise with some concern, and may wish to see if December’s weak macro data was greatly weather-related (given the rebound in January’s macro data), but it has plenty of time before the next meeting to absorb the various macro data required to make March’s decision.
“It will, however, likely continue to push back on expectations of rate cuts later this year.”