Thoughts

December 16, 2022 | 13:44

Global Rates: Hawks Hold Sway... For Now

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Let’s begin with the good news. Economic growth for 2022 was not as bad as everyone feared. Now the bad news: The weaker figures will show up in late 2022/early 2023. This uncertainty is making central bankers’ jobs that much more difficult as they navigate the waters of high inflation (both headline and core) and tight job markets, all while growth slows. The year is ending with a notable twist as policymakers are all over the map, with some super hawkish and others less so.

On the uber-hawkish end is, surprisingly, the ECB. It raised rates 50 bps on December 15, bringing the refi rate to 2.50%. That as-expected move followed two 75 bp rate hikes in a row, but that is where the moderation ends. The true hawks are running the Governing Council now, judging by the Statement, which introduced some strong wording: that rates still need to rise “significantly” and at a “steady pace” to reach levels that are “sufficiently restrictive”. And, President Lagarde admitted that 50 bp hikes should be expected “for a period of time”. That clarity is rare (almost puts it in the same camp as statements from Brazil and Norway) and is a clear sign of the ECB’s intentions. We now look for the refi rate to hit 3.75% by mid-2023, and stopping as the economy contracts, which, along with the rate hikes and QT, will help slow the rate of inflation. On net, we look for no growth at all in 2023, before rebounding to 1.5% in 2024.

In Britain, however, the recession will be deeper. It may not be a record eight quarters long, as the BoE predicts, but it will be significant enough to cause real GDP to fall over 1¼% in 2023. The same suspects plaguing the rest of the world are also present in the U.K., but it also has the impact of Brexit still playing out (weighing on trade and the labour supply). Meantime, the BoE has its own internal problems, given the wide range of opinions of where its Bank Rate should be. For now, the moderate hawks make up the majority, and we look for rate hikes to continue into early 2023, bringing terminal to 4.25% from 3.5%, currently.

The BoJ has stood out all year as it has been glued to the sidelines with its easy monetary policy stance of negative rates (-0.1%), and keeping 10-year JGB yields at around 0%. Even as the JPY plunged to 32-year lows of ¥150 at one point, and the core CPI hit a 41-year high of 3.6%, the Bank did not blink, though the Summary of Opinions from October indicated that some are getting a little uncomfortable with the side effects of their policies. In any event, the Bank will stay on this path until inflation stabilizes around 2%, but expect the Board to revisit its policies once Governor Kuroda steps down in April. Although radical changes are unlikely, there is always a possibility of some tweaks, such as widening the band around 10-year bonds.

The PBoC stands with Japan in that it is dovish; but, there is a difference in that the PBoC is making changes. As recently as November, it cut the reserve requirements for most banks by 25 bps, the first such move since April. And, in August, it trimmed its one-year loan prime rate (LPR) by 5 bps to 3.65%, and its 5-year LPR by 15 bps to 4.30%. China’s economy has struggled mightily under the weight of COVID restrictions and slower demand by its global customers. Look for further easing in 2023, but the government has taken a step in the right direction by easing restrictions on its zero-COVID policies. The hope now is that there will not be another resurgence in cases, particularly around the Lunar New Year.