“Awesome peak hikes” even if it’s not peak rates :Mike Dolan

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LONDON – Although far from a peak in central bank rates, it is entirely possible that we will at least see a peak of “super hikes”.

It may be a cakewalk for optimists, but it will be important in determining how much rates will climb next year as economic growth comes to a screeching halt. The European Central Bank and the Bank of Canada both aped the last two 75 basis point rate hikes from the US Federal Reserve this week and the Bank of England looks set to follow suit next week. And that’s all before the Fed executes a hat-trick of oversized 75 basis point moves later this month.

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Aside from Japan, which insists on standing still even in the face of creeping inflation and a plummeting yen, this puts most G7 central banks at full throttle in tightening credit to reduce high inflation for decades. decades.

And despite still surprisingly benign core economic forecasts for next year from at least the Fed and the ECB, many policymakers are now acknowledging that the so-called “soft landing” they are trying to steer their economies will likely involve at least some form of mild recession.

And as might come early next year after an energy-stressed winter, the temptation for central banks is to move fast and hard now to get rates to levels where they pinch before a hawkish tilt to persistent inflation becomes more difficult with rising unemployment.

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Announcing the biggest rate hike in the ECB’s short history on Thursday, one of ECB chief Christine Lagarde’s buzzwords was ‘frontloading’ and markets assume that’s how it is. take place.

Although Lagarde declined to rule out another 75 basis point move and said further hikes were expected in “future meetings”, it does feel like this week was the biggest shot.

“The ECB will strive to bring its key rates back into neutral territory fairly quickly – (but) expect further 50 basis point hikes in key rates in October and December,” the portfolio manager said. PIMCO, Konstantin Veit, adding that the ECB was likely to return to a quarter point. moving next year.

Money markets have clearly taken notice of the ECB’s hawkish turn and expect it to raise its newly positive deposit rate from 0.75% to a high of around 2.25% by May this year. ‘next year.

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Getting to that “terminal rate” by then would clearly allow for smaller hikes in the five interim meetings – although some economists think even that might be fanciful given winter energy risks.

“Given the stagnant and potentially negative quarters of growth ahead, rates ultimately won’t rise as high as the market currently expects,” said Lombard Odier economist Samy Chaar, adding that peak rates for the ECB could be as low as 1.5%.

Federated Hermes’ Silvia Dall’Angelo thinks the ECB is “exploiting a narrow window of opportunity to aggressively raise rates” in hopes of stemming second-round inflation effects – but she also thinks it would be forced to take a break by the end of this year.

JUMBO HIKES ON

But there is a similar picture in Washington.

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If the Fed opts for another 75 basis point move this month, it would equate to a 225 basis point hike in key rates in just three meetings – the most severe tightening since the Fed’s scorched earth policy. former President Paul Volcker in the 1980s.

And yet, if an implied terminal rate from the Fed of around 4% for the end of March holds true, that would leave Powell and Co an additional 100 basis points over 3 meetings, slowing the current frantic pace of increases.

With drastic changes in forecasts for peak inflation in the UK next year, due to the postponement of the energy price cap and government subsidy plans this week, the picture could be murkier.

But a similar scenario of hitting a ‘super max rise’ would still occur under the current constellation of prices – even before you enter into a debate about whether the depth of the UK recession or borrowing plans The government’s additional funds will even allow the BoE to obtain rates close to 4%.

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As it stands, peak implied UK rates are around 4.25% for June next year, around 250 basis points above current rates and above markets’ long-term inflation expectations.

But then again – if that terminal rate and date stays roughly the same after the BoE pulls the 75bp trigger next week, then there would be six meetings left to exploit the 175bp hikes on. remaining. And swap markets are currently tilting towards a 50bp move and then 25bp clips thereafter.

While all of this is not immune to a higher overall cost of borrowing – or how long rates will stay there or even the effects of balance sheet unwinding in long-term bond markets in the background – it will mitigate shock waves in more difficult situations. times at least.

The opinions expressed here are those of the author, columnist for Reuters.

(by Mike Dolan, Twitter: @reutersMikeD; graphic added by Andy Bruce Editing by Susan Fenton)

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