Interest rate updates are due next week from both the US Federal Reserve and Bank of England and rises are firmly on the minds of both central banks.
The Fed is due to announce its rate decision on Wednesday having already signalled it is keen on a 0.5% rise to its Fed funds rate.
US inflation hitting a new 40-year high the Friday before (10 June) is unlikely to alter the Fed’s current thinking, according to economists.
“The Federal Reserve is widely expected to follow up May’s 50bp (0.5%) interest rate increase with another 50bp hike at the forthcoming FOMC meeting, taking the Fed funds target range to 1.25%–1.5%," said economists at ING bank.
Following the inflation data, ING said it was hopeful – but a "low conviction" hope – that May's marks the peak for headline inflation.
“Demand continues to outpace the supply capacity of the US economy and with supply factors showing little sign of near-term improvement, the onus is on the Fed to dampen the demand side of the equation with ongoing rate hikes.
“The breadth of inflation pressures in the economy should alarm the Fed and will certainly keep the hawks in the ascendancy and weaken the case for those arguing for a potential pause in the Fed hiking path in September."
With the Fed “pretty much guaranteed” to hike by 50bps, Marshall Gittler at BDSwiss said the market will “want to get some insight into how they see the risks going forward” and whether they see inflation is peaking or continuing higher.
In this respect, the focus is likely to be on the Fed's new economic projections, containing forecasts for inflation and the fabled “dot plot” of the policymakers’ forecasts for the fed funds rate.
UK heading for fifth rise
The Bank of England meanwhile has also been on a steady upward path for months with the increase in the Bank Rate by 25bps to 1% during its May 2022 meeting the fourth rise in a row.
UK borrowing costs are now the highest since early 2009, although three members of the monetary policy committee (MPC) wanted rates to rise by even more last time, with inflation is expected to rise further over the remainder of the year and average slightly over 10% at a peak in the fourth quarter of 2022.
The bad news is that another rise is very likely this month to be followed by further MPC hikes in August, September, November and December when the base rate will hit 2.25%.
Most economists predict the committee will stick with 25bp moves, "as the threats to the growth outlook continue to build," said Peel Hunt.
However with the Fed hiking rates at a 50bp pace and the European Central Bank signalling a similar move for September, the MPC may take the opportunity to join the pack and increase rates even faster, said Bernberg, putting a 30% chance on a 50bp hike at either the June or August meeting.
But with the economy starting to stutter as the highest inflation in the G10 squeezes household and corporate incomes along with a further round of tax increases, the MPC has to “tread a fine line between fighting inflation and kicking the already-reeling economy down the stairs”, says Gittler.
“People will want to get some insight into how this debate is playing out among the members of the MPC.”
So the main impact of the BoE meeting “will come not from what they do...but from what they say or imply”.
If the hawks are in the ascendant it might help to boost the pound from its recent lows, whereas a retreat could send sterling down to $1.20.
The Swiss and Japanese central banks are also meeting in the coming week, with their meetings not in much doubt, either - though both are expected to do nothing.