Central bank

50bps Hikes Due

09 December 2022 • 5 mins read

Chair of the U.S. Federal Reserve Jerome Powell addressing the economic outlook, inflation and the labor market at the Brookings Institution, November 30, 2022 in Washington, DC. AFP.

This month the Federal Reserve (Fed) is set to lift its fed funds rate by 50 basis points (bps) to 4.25-4.50%, a step down from the rapid 75bps hikes at its last four meetings as US inflation finally starts to cool.

The Fed is likely to raise its forecasts for the peak in its interest rates to 5.00% in 2023. If its forecasts are even more hawkish, the USD and Treasury yields will rise and risk assets weaken.

The European Central Bank (ECB), Bank of England (BoE) and Swiss National Bank (SNB) are also set to hike by 50bps to 2.00%, 3.50% and 1.00% respectively.

The ECB and BoE, facing double digit inflation, may consider 75bps hikes, but rising recession risks are set to make Europe’s central banks step down to 50bps too in the week ahead.

This month, the Federal Reserve (Fed) is set to lift its fed funds rate by 50bps to 4.25-4.50%, a step down from the rapid 75bps rate hikes at its last four meetings as US inflation finally starts to cool.

Source: Bank of Singapore, Bloomberg.

As the chart above shows, the Fed’s aggressive actions this year have pushed interest rates above ‘longer-run’ neutral levels so that monetary policy is now restricting activity to lower inflation back towards the Fed’s 2% target.

The Federal Open Market Committee (FOMC) will not want to tighten monetary policy excessively and cause a major downturn in the US economy. So, Chairman Powell and other FOMC members have signalled the Fed will likely slow its pace of rate hikes now with a 50bps rise at its upcoming meeting on 13-14 December.

The FOMC, however, will also be updating its forecasts. We expect officials will increase their projections for the peak in the Fed’s rate cycle to at least 5.00% in 2023 and anticipate no rate cuts until 2024. If FOMC members give even more hawkish rate projections then the USD and US Treasury yields will jump, and risk assets will sell off. Thus, investors should be cautious ahead of the meeting with November’s consumer price index (CPI) inflation due before the Fed’s decision.

Source: Bank of Singapore, Bloomberg.

In the week ahead, we expect the European Central Bank (ECB), Bank of England (BoE) and Swiss National Bank (SNB) will also step down from 75bps rate hikes to 50bps moves.  We forecast the ECB to raise its deposit rate to 2.00%, the BoE to lift its Bank Rate to 3.50% and the SNB to increase its Policy Rate to 1.00% respectively.

The ECB and BoE face inflation at 10.0% and 11.1% compared to their 2% inflation goals. Thus, some officials may be keen to stick to 75bps rate hikes. But with the Eurozone and UK likely in recession owing to the energy shock from the war in Ukraine, we expect the central banks will step down from 75bps hikes to 50bps now.

Lastly, if the ECB surprises by hiking 75bps still, we would be concerned rising financial stress in the Eurozone may force the ECB to unwind its rate hikes quickly in 2023. This is what happened – to the detriment of the EUR – after the ECB prematurely raised interest rates during the 2008 financial crisis and the 2011 Eurozone debt crisis as the second chart shows.

Important information
This product may only be offered: (i) in Hong Kong, to qualified Private Banking Customers and Professional Investors (as defined under the Securities and Futures Ordinance); and (ii) in Singapore, to Accredited Investors (as defined under the Securities and Futures Act) and (iii) in the Dubai International Financial Center to Professional Clients (as defined under the Dubai Financial Services Authority rules) only. No other person should act on the contents of this document.This product may involve derivatives. Do NOT invest in it unless you fully understand and are willing to assume the risks associated with it. If you have any doubt, you should seek independent professional financial, tax and/or legal advice as you deem necessary.

Please carefully read and make sure that you understand all Risk Disclosures, Selling Restrictions, and Disclaimers. This document must be read together with the relevant Prospectus & Offering Documents &/or Key Fact Statement.

This document is prepared by Bank of Singapore Limited (Co Reg. No.: 197700866R) (the “Bank”), is for information purposes only, and is not, by itself, intended for anyone other than the recipient. It may contain information proprietary to the Bank which may not be reproduced or redistributed in whole or in part without the Bank’s prior consent. It is not an offer or a solicitation to deal in any of the investment products referred to herein or to enter into any legal relations, nor an advice or by itself a recommendation with respect to such investment products. It does not have regard to the specific investment objectives, investment experience, financial situation and the particular needs of any recipient or customer. Customers should exercise caution in relation to any potential investment. Customers should independently evaluate each investment product and consider the suitability of such investment product, taking into account customer’s own specific investment objectives, investment experience, financial situation and/or particular needs. Customers will need to decide on their own as to whether or not the contents of this document are suitable for them. If a customer is in doubt about the contents of this document and/or the suitability of any investment products mentioned in this document for the customer, the customer should obtain independent financial, legal and/or tax advice from its professional advisers as necessary, before proceeding to make any investments.

The Bank, its Affiliates and their respective employees are not in the business of providing, and do not provide, tax, accounting or legal advice to any clients. The material contained herein is prepared for informational purposes and is not intended or written to be used, and cannot be used or relied upon for tax, accounting or legal advice. Any such client is responsible for consulting his/her own independent advisor as to the tax, accounting and legal consequences associated with his/her investments/transactions based on the client’s particular circumstances.

This document and other related documents have not been reviewed by, registered or lodged as a prospectus, information memorandum or profile statement with the Monetary Authority of Singapore nor any regulator in Hong Kong or elsewhere.

This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Bank’s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Singapore, Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates (collectively, “Affiliates”) to any registration, licensing or other requirements within such jurisdiction.

Mansoor Mohi-uddin
Chief Economist
Was this page useful?