Global Interest Rates Rising Faster, Pivot Unlikely in 2023

According to Fitch Ratings’ September 2022 Global Economic Outlook (GEO), global interest rates have risen more rapidly than expected in the past two months, and Federal Reserve and European Central Bank (ECB) policy rates are now likely to peak at a later date and higher level than expected. High inflation outturns and a hardening of central bank resolve to bring inflation down make a pivot back towards rate cuts in 2023 unlikely.

Fitch now expects the Fed funds rate to rise by 50bp to 4.5% at the December FOMC meeting and then by 25bp at each of the February and March 2023 meetings. Rates are expected to remain at 5.0% through the rest of 2023.

The ECB’s main refinancing operations (MRO) rate is expected to rise by 50bp to 2.5% in December, then by 25bp at both the February and March 2023 governing council meetings. The MRO rate is expected to remain at 3% through the rest of 2023.

The Bank of England (BOE) is now expected to raise its base rate by 50bp in December to 3.5% and then by a further 125bp to a peak of 4.75% by 2Q23. This is much higher than the 3% peak at end 2022 anticipated in the September GEO and partly reflects volatility in UK financial markets in late September and early October, according to the October UK Forecast Update.

The Fed, ECB and BOE have all raised interest rates rapidly over the past two months with all three increasing rates by an outsize 75bp at their latest meetings. Despite global energy and food prices softening in recent months and a sharp easing in supply-chain pressures in global consumer goods markets, inflation remains high.

Rising services inflation is a major concern as it signals inflationary pressures are becoming more embedded and self-reinforcing. Services inflation has risen to 6.7% in the US from 4.1% in January, to 6.1% from 3.3% in the UK and to 4.4% in the eurozone from 2.3%.

Wage growth is also elevated – particularly in the US and the UK – reflecting tight labour markets with historically low unemployment and a high ratio of job openings per unemployed person. Monetary tightening has made little progress so far in easing supply-demand imbalances in the labour market.

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