Thoughts

March 24, 2023 | 13:38

Not Yet Time to Batten Down the Hatches

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

If it wasn’t for the current banking turmoil, I shudder to think how many rate hikes markets would be pricing in... globally. Let’s summarize the decisions made after the SVB news ripped through social media at top speed. In no particular order:

The FOMC raised rates 25 bps but considered pausing.
The BoE raised rates 25 bps, a step down in the pace of tightening. Two members wanted to pause, but that had nothing to do with the banking crisis.
The ECB raised rates 50 bps but considered pausing.
The Norges Bank raised rates 25 bps, and gave a head’s up that it will go again in May.
The SNB raised rates 50 bps, and said more hikes “cannot be ruled out”.
The BoJ kept policy unchanged but has, arguably, been on pause for a long, long time. Nothing to do with the current crisis.

Banco Central do Brasil also kept policy unchanged, but the tone was hawkish. The Copom acknowledged the current environment but it “will not hesitate” to tighten again if necessary.

Rate hikes are still the order of the day, as central bankers are not letting the turmoil get in the way of their fight against inflation... yet. There were some interesting developments this week from the ECB. Over a dozen Governing Council members openly pontificated about the rate outlook and the majority sounded the warning bell for another hike at the May 4 meeting. Although the hawkish sounds were not as loud as they once were (even Austria’s ultra-hawk admitted that although he would not rule out three more 50 bp hikes, “I also wouldn’t say that they’ll necessarily come either”), the direction is clear. The ECB is not finished yet. We continue to expect a 25 bp rate hike in May.

The BoE clearly cooled down this week. The majority of the MPC all moved together and the seven members backed the 25 bp hike, after voting for 50 bps in the prior two meetings, and 75 bps back in November. But do not take that as a sign that we are at terminal. Governor Bailey seemed to plead with the public this week: “I would say to people who are setting prices: please understand if we get inflation embedded interest rates will have to go up further”. We continue to expect one more hike (25 bps) in May, as the country still faces double-digit headline inflation. But, there will be one more inflation and jobs reports to factor in before the May 11 announcement. If they show signs of improvement, and if the market uncertainty flares up again, the BoE will seize the opportunity to call it a day.