November 25, 2022 | 16:50
As The World Turns
It is interesting to compare what we were digesting exactly six months ago to what we learned this week. Back in late May, the FOMC minutes from the May 4 meeting revealed that “most participants” were behind the 50 bp rate hike (which, at that point, was the Fed’s biggest increase in over two decades) and that further moves of that magnitude would “likely be appropriate”. The RBNZ raised rates 50 bps to 2% and hawkishly warned that its policy rate could hit 3.25% this year. And, the BoK lifted rates 25 bps to 1.75%, and cautioned of the potential for bigger hikes.
Fast-forward to this week. The FOMC minutes from the November 2 meeting stated that a “substantial majority” backed a slower pace of rate hikes “soon”. The Federal Reserve may be feeling a tad lonely with its less hawkish leanings, but don’t describe it as dovish. The dovish camp would include the ever-accommodative BoJ, and the PBoC, which, for the first time since April, cut the RRR for all banks. On the more hawkish side would be the RBNZ, which hiked rates by a record 75 bps to a 14-year high of 4.25% and signalled that it wasn’t finished as core CPI was “too high”, employment was “beyond its maximum sustainable level”, and inflation expectations had risen. The BoK lifted rates 25 bps to a decade-high 3.25% and, judging by the vote (one board member is done; three see peak rates as one rate hike away; and, two see terminal to be above 3.50%), it is also not finished. The Riksbank raised its key lending rate 75 bps to a 14-year high of 2.50%, and it will “probably be raised further at the beginning of next year”.
Then, there is the ECB. The Minutes from its October meeting showed that a “very large majority” was in favour of its 75 bp hike, outnumbering the “few” who preferred a 50 bp’er. Since then, inflation has continued to hit record highs while economic activity has slowed. If the November CPI (due out November 30) climbs above October’s 10.6% y/y rate, another like-sized move cannot be ruled out at the December 15 policy meeting. But it will be a tough sell, as various members of the Governing Council are beginning to lose their appetite for frontloading these hikes. The biggest hawk, Austria’s Robert Holzmann, may be in the minority with his backing of another 75 bp move next month. (Think of Holzmann as the equivalent of Bullard.) He is joined by Executive Board Member Isabel Schnabel, who feels that the biggest risk for policymakers was forming decisions “falsely calibrated on the assumption of a fast decline in inflation”. But another hawk, the Bundesbank’s Joachim Nagel, described 50 bps as “a strong move”, while Chief Economist Philip Lane said that “one platform for considering a very large hike, such as 75 bps, is no longer there”. It will be a tough choice between 50 and 75.
Bottom Line: Central banks are no longer falling in line with their tightening policies. Although the Fed is ready to move in smaller steps, others are still barrelling ahead.