As expected, central banks in the US, UK and eurozone all continued down a tightening path in early February, with rates hitting their highest level since the Global Financial Crisis.
- The Fed eased the pace of its tightening
- The UK recession is expected to be shorter and shallower than feared
- The ECB is set to implement at least one more 50bp increase
Still on a tightening path: as expected, central banks in the US, UK and eurozone all continued down a tightening path in early February, with rates hitting their highest level since the Global Financial Crisis. Nevertheless, with inflationary pressures showing signs of cooling and the US easing the pace of its tightening, investors will be watching macroeconomic data releases closely for signs of the future direction of travel.
“Keeping interest rates at restrictive levels will over time reduce inflation” (ECB)
Fed slackens the pace: the Federal Reserve (Fed) increased interest rates for an eighth consecutive time, raising its key federal funds rate by one-quarter of a percentage point to a range of 4.5% to 4.75%. Although rates are now at their highest level for over 15 years , the Fed’s decision represented a moderation in the rate of its tightening compared with a 50 basis point increase in December and four earlier increases of 75 basis points. Nevertheless, Fed officials intend to continue raising rates until inflation is under control; the rate of inflation fell once again in December to 6.5% .
Clouded outlook for the UK: UK interest rates reached their highest level since 2008 as the Bank of England raised the base rate by 50 basis points to 4%. Although the UK economy is not expected to return to its pre-pandemic level until 2026, central bank officials now expect a shorter, shallower recession than previously feared, to take place from mid-2023. Meanwhile, the UK’s rate of consumer price inflation moderated in December from 10.7% to 10.5%. Nevertheless, the International Monetary Fund expects the UK to perform worse than other advanced economies this year, predicting an economic contraction of 0.6%.
ECB will not be swayed: the European Central Bank (ECB) raised its key interest rate by 50 basis points to 2.5%. ECB officials expect at least one more 50 basis point increase, to be implemented in March , after which they should have sufficient data to reassess their position. Nevertheless, there was no suggestion that rates are likely to ease in the near future; the ECB intends to “stay the course”, commenting: “Keeping interest rates at restrictive levels will over time reduce inflation”. The eurozone’s annualised rate of inflation fell from 10.1% to 9.2% in December, and the region’s economy confounded expectations by posting a marginal expansion in the final quarter of 2022, although the outlook for Germany remains subdued.
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