Our latest major central bank calls | article

Abraham Smith

We now expect the Fed rate to peak at higher levels, but still see rate cuts likely through year-end. The European Central Bank is likely to slow the pace of interest rate hikes beyond March, while the Bank of England looks very close to the end of its tightening cycle

Our key central bank forecasts

Source: Macrobond, ING forecasts

federal reserve

After four consecutive 75 basis point rate hikes, the Federal Reserve moved to 50 basis points in December and then 25 basis points in February. The data has been strong since, as the economy added 517k jobs in January, retail sales rose 3%m/m and core-level inflation picked up again. Several Fed officials have since commented that they would have considered a 50 basis point move in February had they known. But those delivering that message are all abstainers this year, and with borrowing costs rising across the economy and banks tightening lending standards, we think the Fed will stick with a 25 basis point hike. Still, given the current situation, we believe the Fed will now hike in March, May and June. Inflation is still decelerating and this process is likely to accelerate over the summer months and with job loss announcements mounting, we still expect rate cuts before the end of the year – we expect a 50 basis point cut in December.

European Central Bank

As long as core inflation remains stubbornly high in the eurozone, the ECB will continue to raise interest rates and will not consider future rate cuts. A 50 basis point rate hike at the March meeting has been pre-announced and looks like a done deal. Beyond the March meeting, the ECB appears to be entering a new game where further rate hikes will not necessarily find the same support from the Governing Council as a move into hawkish territory increases the risk of a negative impact on the economy. The main question after the March meeting will be whether the ECB will wait and see the impact of its tightening on the economy or whether it will continue to rise until core inflation starts to ease significantly. We currently expect a compromise: two more rate hikes of 25 basis points each in May and June before interrupting the rate hike cycle and entering a longer wait period.

Bank of England

The Bank of England meeting in February saw a sharp shift in communication, with policymakers signaling that the end of the tightening cycle is near. Further increases are conditional on signs of additional “inflation persistence,” suggesting policymakers are less reliant on monthly fluctuations in data and more focused on longer-term trends. In truth, the news here is mixed. The bank’s own survey has suggested that hiring difficulties may be easing and price/wage expectations may have peaked. The same cannot be said for official wage data, although core services inflation has taken a surprise nosedive in the latest numbers. Officials have clearly indicated that future hikes will come in 25bp increments and have stressed that much of the impact of past hikes is yet to be felt. Barring the inflation/wages data becoming more worrying, we believe a 25 basis point hike in March will likely be the last.