What will the Fed signal about the future path of rate rises?
At its November policy meeting next week, the Federal Reserve is widely expected to announce a fourth consecutive 0.75 percentage point increase in interest rates. This would bring its key rate to 3.75 to 4 per cent, the highest since December 2007.
The futures market has nearly fully priced in the likelihood of that 0.75 rise. What’s less certain is what Fed chair Jay Powell will signal about rate increases going forward. As the global economy has slowed and inflation appears to have peaked, some believe the Fed is more likely to moderate the pace of its tightening.
Investors in the futures market are betting on higher odds that a 0.5 percentage point increase in rates will be announced at the final meeting of the year in December.
The Fed has been clear about its commitment to stamping out inflation at all costs, indicating that it is unlikely to loosen monetary policy until inflation has reapproached its 2 per cent target.
But a less aggressive approach may be imminent as the US central bank’s vision is being questioned by politicians and investors among others, who fear the possibility of a Fed overcorrection that will compress the US — and potentially even the global — economy.
There have already been signs of a slowdown in housing in the US as well as big dips in earnings and forecasts this quarter. Third-quarter GDP released Thursday showed that the US economy had expanded in the latest three-month period, but the headline figure masked indications of weaker domestic consumer demand. Kate Duguid
How aggressively will the BoE raise rates?
The Bank of England is expected to raise rates by the largest amount in 33 years next week as it fights the highest inflation in four decades.
Economists polled by Reuters on average expect the bank to increase its key rate by 0.75 percentage points from its current level of 2.25 per cent. The last time it increased rates by more than 0.5 percentage points was in 1989.
Imogen Bachra, head of UK rates strategy at NatWest expects a 0.75 percentage point increase and explained that “although the government has reversed three-quarters of its “mini” Budget tax cuts, about £15bn survived the cull and this will probably be sufficient to elicit another step-up in the pace of policy tightening.”
She added that with trade-weighted sterling 3 per cent below August Monetary Policy Report levels, the Bank also has some additional imported inflation to counter.
Some economists have revised down their rate increase expectations from one percentage point to 0.75 percentage points following the decision to postpone the Treasury’s Autumn Statement to November 17, which means the fiscal outlook will be based on lower borrowing costs.
However, Dani Stoilova, economist at BNP Paribas noted that a large increase is justified by the labour market which remains “extremely tight” and a persistent inflation shock that increases the risk of more permanent high inflation.
However, she said the case for a one percentage point increase has reduced as “monetary and fiscal policy are no longer pulling in opposite directions.”
Markets expect the tightening cycle to continue beyond November with the policy rate rising to 4 per cent in February and exceeding 4.5 per cent by May next year. Valentina Romei
Will eurozone inflation data top estimates?
Inflation in the eurozone has consistently outstripped expectations for much of this year and it looks likely to do so again on Monday when price growth data for the single currency zone are released.
Germany, France and Italy all reported hotter than expected inflation data for October on Friday, prompting several analysts to raise their forecasts for overall price growth in the 19-country euro area.
Monday’s data will be a crucial input into the debate about how soon inflation is likely to peak and allow the European Central Bank to take its foot off the pedal on interest rate rises.
Economists polled by Reuters were on Friday expecting eurozone inflation to dip slightly in October to 9.8 per cent down from the record high of 9.9 per cent it hit a month earlier.
But several economists lifted their forecasts after stronger than expected national pricing data on Friday. Marco Valli, global head of research at Italian bank UniCredit, predicted the eurozone figure would rise to 10.3 per cent, while Goldman Sachs forecast 10.9 per cent.
“Signs that underlying inflationary pressures are continuing to build suggest the bank will ultimately have to push rates into restrictive territory,” said Franziska Palmas, an economist at Capital Economics.
Eurostat will on Monday also deliver third-quarter gross domestic product figures, expected to show growth slowing to 0.2 per cent, versus 0.8 per cent in the previous quarter.
Growth is another factor closely watched by ECB rate-setters that could also surprise on the upside after the German economy defied recession fears by growing 0.3 per cent in the period. Martin Arnold
