BREAK TILL DAWN. FED RATE PAUSE
Dear clients,
The US Federal Reserve left interest rates unchanged on Wednesday, but made it clear in new forecasts that borrowing costs may have to rise by half a percentage point by the end of this year as the US central bank responded to a stronger-than-expected economy and a slower decline in inflation.
In a press conference at the end of the central bank's latest meeting, Fed Chairman Jerome Powell said that US economic and labour market growth was better than expected under the weight of aggressive monetary tightening last year, which will likely lengthen the Fed's fight to reduce inflation, but also allow it to pass with less economic damage.
According to Powell, the pause was made out of caution to allow the Fed to gather more information before determining whether to raise rates again, with the pace of rate hikes now less important than finding the right endpoint that will slow price growth while minimising unemployment growth.
After a year in which many economists and analysts argued that recession was inevitable and the economy was about to crack, according to the Fed's latest quarterly outlook "growth estimates have gone up slightly, unemployment estimates have gone down slightly, inflation estimates have gone up," Powell said.
The Fed's rate hike coincides with an improved view of the economy and hence slower progress in returning inflation to the central bank's 2% target. It is currently more than double that target.
Wednesday's decision interrupted a string of 10 consecutive rate hikes adopted by the Fed in response to the worst inflation outbreak in 40 years with a corresponding set of aggressive moves, including four excessive hikes of three-quarters of a percentage point last year.
A WAY FORWARD. ECB RATE HIKES
Dear clients,
The European Central Bank on Thursday raised the eurozone's borrowing costs to their highest level in 22 years and said that stubbornly high inflation almost guarantees another hike next month and probably beyond.
The quarter percentage point increase was the ECB's eighth consecutive interest rate hike since it badly miscalculated the sustainability of price growth early last year, bringing its policy rate to 3.5 per cent, a level not seen since 2001.
This came at the same time as confirmation that the ECB is winding down its remaining post-crisis stimulus programmes and an unexpectedly sharp increase in core inflation forecasts by bank staff.
"Unless there are significant changes to our baseline forecasts, it is very likely that we will continue to raise rates in July," ECB President Christine Lagarde told a news conference.
The central bank of the 20 euro-sharing countries also said it now expects inflation to remain above the 2% target by the end of 2025.
The bank raised its forecasts for "core" inflation for 2023 and 2024, excluding volatile energy and food, which the ECB monitors closely. Lagarde also issued her strongest warning yet on rising wages and companies pushing up prices.
Inflation in the eurozone has been falling for months, thanks to lower energy prices and the sharpest rate hike in the ECB's 25-year history. However, it remains unacceptably high for the ECB at 6.1% and underlying price growth is just starting to slow down despite signs of stagnant economic growth.
Although opposing economic factors have likely served as weapons for both sides in the ECB Governing Council, the hawkish majority that insists on further rate hikes remains at the helm.
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