Global Economy Forecast: European and Asian Banks Follow US Fed Rate Hike Decrease — What It Means
Following the Federal Reserve’s latest — and smaller — rate hike on Dec. 14, other central banks followed suit on Dec. 15, announcing a moderation of their rate increases. While the hikes decreased, there is no pivot in sight, and projections for persistent inflation and a continued global hawkish stance sent global markets into a sell-off.
“Equity markets are back in the red on [Dec. 15] as investors reel from the nasty shock delivered by the Fed and look ahead to the plethora of central bank rate decisions on the agenda today,” said Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA. “Safe to say, investors simply didn’t see that coming. Two months of better-than-expected inflation data were enough to convince them that the Fed would not only ease off the brake, but signal it would do so more in the coming months.”
On Dec. 15, the European Central Bank (ECB) raised its rates by 50 bps, following two 75 bps hikes in September and October. However, with inflation at a whopping 10% in November, the ECB said it expected to raise the rates “significantly further, because inflation remains far too high and is projected to stay above the target for too long,” according to a statement.
“After gouging themselves on hopes for a Fed pivot, equity traders are experiencing indigestion from yesterday’s FOMC statement, which reiterated Jerome Powell’s theme of ‘higher for longer.’ This is not simply a domestic situation, as the Bank of England and ECB rate hikes confirmed earlier today,” said John Lynch, CIO for Comerica Wealth Management.
Indeed, the ECB also revised up its inflation projections, with average inflation reaching 8.4% in 2022 before decreasing to 6.3% in 2023.
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“The ECB rate decision sent European yields surging higher after President Lagarde signaled they will raise further and that rate increases will need to be significant and at a steady pace. Lagarde reset market expectations for how high rates can go, which should cripple the economy,” said Edward Moya, senior market analyst, The Americas OANDA, adding that if the next couple of meetings contain consecutive half-point rate increases, the eurozone will have a much deeper recession. “The euro was unable to hold onto gains as the flight-to-safety eventually drove investors back into the dollar,” he added.
Furthermore, Moya said, “The global economy is heading towards a recession as inflation trends ease. Central banks mostly remain in tightening mode but some might have more work to do. The BOE delivered a dovish hike, while the ECB showed traders with their hawkish guidance. The global economy is headed towards a rough patch as monetary policy becomes very restrictive.”
Also on Dec. 15, the Bank of England (BOE) raised interest rates by 0.5 percentage point to 3.5%, saying that there are “considerable uncertainties around the outlook,” and if it “suggests more persistent inflationary pressures, it will respond forcefully, as necessary.” The country’s inflation is also extremely high — despite a slight decrease to 10.7% in November, from 11.1% in October, according to a statement.
And in Asia, the central bank of the Philippines — Bangko Sentral ng Pilipinas — announced a smaller 50 bps hike on Dec. 14, according to a statement. This follows a 75 bps increase at the last meeting, Bloomberg reported.
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“Amid broad-based inflation pressures, persistent upside risks to inflation, and elevated inflation expectations, the Monetary Board deems it necessary to take aggressive monetary action to bring headline inflation back to within target as soon as possible,” the central bank said in the statement.
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