Interest rate rises is on the way

The US central bank (Fed) and the European Central Bank (ECB) are expected to move on the path of increasing interest rates, which started months ago, next week, but its end is faintly visible on the horizon.

With inflation on a downward trend in recent months on both sides of the Atlantic, falling to 7.1% in the US and 9.2% in the Eurozone in December, a debate has begun at both central banks about next steps, in order to bring inflation back to the common target of 2%.

The debate is more intense in the case of the Fed since it has been aggressively tightening policy since last March, four months before the ECB, and has already raised its key interest rate by 4.25 percentage points in the range from 4.25% to 4.5%.

Last month, the Fed slowed its interest rate hike to 50 basis points, and on Wednesday it is very likely to slow further to 25 bps.

Markets are betting that the Fed will stop its policy tightening soon, possibly in mid-March after another 25 basis point hike. and to start cutting interest rates in 2023. It is these expectations that have led to a recovery in stock markets and bond markets.

However, the average forecast by Fed officials in December was that the interest rate would peak at 5.1% and remain there until the end of 2023. That means another 25bp rate hike is likely. in May.

The ECB meets on Thursday, a day after the Fed, and is expected to raise its key interest rates by 50bps, leaving the deposit rate at 2.5% and the lending (discount) rate at 3%. while the interest rates on the loans of those who have taken a loan from the banks with an interest rate linked to the Euribor will increase accordingly.

Another increase of 50 m.p. expected in mid-March as ECB President Christine Lagarde last month announced further hikes of this order through 2023 and some members of the Governing Council were quick last week to recall those statements.

For post-March, the pace of ECB rate hikes is likely to slow to 25 bp. and the time when their upward cycle will be completed will become clearer.

How many rate hikes will happen after March will depend on the path and prospects for deflation in inflation. The sharp decline in natural gas prices has revived expectations for a faster CPI detente and more optimistic market and analyst forecasts.

In a recent Bloomberg survey, economists polled forecast the ECB to complete hikes in May, with the deposit rate at 3.25% and the lending rate at 3.75%. Others, however, would see the deposit rate rise to 3.75% and the lending rate to 4.25%.

Source: inbusinessnews.reporter.com.cy

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