24 hours of jumbo interest-rate hikes to cap year of soaring inflation

More than 50 central banks have gone for 75-bp increases, with over 275 rate hikes this year

The world’s biggest central banks will this week wrap up the most aggressive year for interest-rate hikes in four decades with their fight against inflation still not over even as their economies slow.

The US Federal Reserve on Wednesday is set to raise its key rate by 50 basis points (bps) to a range of 4 per cent to 4.5 per cent, the highest since 2007, and to signal more increases in early 2023.

A day later, the European Central Bank and the Bank of England are likely to follow with half-point moves.

The year ends much differently than it started. Back in January, most policymakers were acknowledging they were wrong to have bet 2021’s inflation surge would soon fade, but still assuming they could restrain prices with a steady constriction of policy.

Instead, multiple metrics show how an acceleration in global inflation to around double-digits forced them to squeeze hard.

Bank of America has spotted around 275 rate hikes this year, enough for one every trading day, with just 13 cuts. More than 50 central banks have executed once-rare 75 bps increases, some joining the Fed in doing so repeatedly.

Although signs are mounting that inflation has peaked in most places, the big question now is what happens in 2023.  The worst case is inflation proves stubborn and recessions begin, creating a stagflationary nightmare for central banks.

The best hope is consumer-price growth retreats fast enough to enable policymakers to stop jacking up rates and consider reducing them to boost growth.

While many investors expect a pivot at some point, Fed Chair Jerome Powell and ECB President Christine Lagarde, both of whom are to speak this week, say their focus remains on tackling inflation even if doing so hurts demand and hiring.

Federal Reserve

The Fed is expected to begin tempering the pace of monetary policy tightening this week with a half-point hike, the target rate for overnight bank lending will continue to be lifted in early 2023.

Another 50 bps boost would amount to 4.25 per centage points worth of interest-rate increases over 2022, a year that saw inflation soar to a four-decade high and left policy makers scrambling.

Fed officials, who conclude their policy meeting Wednesday, will get one final peak at a key inflation metric when the government on Tuesday issues the November consumer price index. Economists project 0.3 per cent increases in the overall and core measure that excludes food and fuel.

European Central Bank

The ECB will probably hike rates by 50 bps, after inflation in the euro area slowed for the first time in 18 months.

Yet with consumer-price growth still at 10 per cent, a third consecutive 75 bps move can’t be completely excluded and some of the more hawkish rate setters have suggested they’d back such a step..

The Governing Council’s decision will also be influenced by new quarterly economic forecasts, which will likely see a downgrade in growth and upgrade in inflation projections for 2023.

Additionally, policymakers are scheduled to decide on the key pillars of their strategy to unwind debt of $5.2 trillion.

Bank of England

The BOE is widely expected to boost its benchmark lending rate a half point to 3.5 per cent, which would be the highest since 2008.

With inflation at a 41-year high of 11.1 per cent and consumers increasingly expecting elevated prices for the next few years, policy makers have said they will act forcefully to prevent a wage-price spiral.

Recession is now underway and expected to last into 2024, and households are suffering from the tightest cost-of-living squeeze on record with energy prices are six times higher than usual.

Other global economies

The Bank of Russia is expected to hold rates steady on Friday, with its latest round of easing ending as inflation risks grow. The Kremlin is touting the smaller-than-expected GDP contraction this year, but the central bank has warned that new G-7 restrictions on oil sales could hit output as they kick in next year.

Beyond central banking, markets will be watching data out of China, where retail sales, investment and industrial output numbers due Thursday are set to show a deepening in the economy’s struggles in November as Covid Zero restrictions — now being eased — weighed on activity.