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Central banks ramp up rates again but the pace slows

Central banks in Britain, Norway, Switzerland, the euro zone and the United States have all raised interest rates this week.

Many have slowed the pace of their hikes. But the Federal Reserve and the ECB are still talking tough about battling high inflation even after signals that consumer price increases are tailing off.

Overall, 10 big developed economies have raised rates by a combined 2,740 basis points (bps) in this cycle to date, with Japan the holdout dove.

Here’s a look at where policymakers stand from hawkish to dovish.

Central banks ramp up fight against inflation

The Fed on Wednesday lifted interest rates by 50 bps into a range of 4.25% to 4.5% in its seventh rate rise this year and followed a string of extra-large 75 bps hikes at its four previous meetings.

Fed chair Jerome Powell pledged more rate rises next year to safeguard the economy from high inflation, which he said he was not ready to characterise as having peaked. U.S. headline consumer prices rose at an annual rate of 7.1% in November, the smallest advance in nearly a year.

The Bank of Canada hiked rates by 50 bps to 4.25% on Dec. 7, taking borrowing costs to their highest level in almost 15 years to tame inflation.

Canada’s rates have risen at a record pace of 400 bps in nine months. Inflation, which held steady at 6.9% in October, is more than three times its target.

In a hint that it may be done with rate rises, however, the BoC eliminated the forward guidance it has used since it began cranking up borrowing costs in March.

The Reserve Bank of New Zealand (RBNZ) upped its pace of tightening in November, delivering a record 75 bps rate rise after five consecutive 50 bps rate increases.

Minutes from the meeting showed the RBNZ also considered a larger 100 bps hike but opted for a smaller increase. The central bank raised its forecast for its peak interest rate to 5.5%, up from a previous forecast of 4.1%.

The Bank of England raised its benchmark rate by 50 bps on Thursday to 3.5%, but with a reassuringly dovish outlook. Governor Andrew Bailey said in a letter to finance minister Jeremy Hunt that UK inflation, which stood at 10.7% in November, had probably reached a peak.

Money markets moved after the statement to forecast UK interest rates will top out at around 4.5% in August.

The Reserve Bank of Australia (RBA) pushed ahead with a third straight 25 bps hike in December, taking the Official Cash Rate to 3.1%, its highest level in a decade.

RBA Governor Philip Lowe retained the bank’s hiking bias, saying it expects to increase rates further.

Norway, the first big developed economy to kick off a rate-hiking cycle last year, maintained a slower pace on Dec. 15, raising its benchmark rate by 25 bps for the second consecutive meeting to 2.75%.

But Norges Bank governor Ida Wolden Bache also forecast borrowing costs would reach 3% next year, as the central bank balances a slowing economy with above-target inflation.

The European Central Bank raised rates by half a percentage point on Thursday, its fourth successive hike, and outlined plans to shrink its bloated balance sheet from March.

It hopes that higher borrowing costs will arrest runaway inflation, running well above target. The ECB also kept further rate hikes firmly on the table.

Sweden’s central bank raised its key rate by 75 bps to 2.5% in November and signalled further hikes are likely.

Inflation remains stubbornly high, with the headline year-on-year rate rising to 9.5% in November. Markets anticipate an 80% chance of a 50 bps hike when the Riksbank meets next in February.

The Swiss National Bank (SNB) raised its policy rate by 50 bps to 1% on Dec. 15. It was the third straight hike but marked a slowdown after a 75 bps increase in September.
SNB Chairman Thomas Jordan said it was too early to “sound the all-clear” on inflation, which held steady at 3%, year-on-year, in November.

The Bank of Japan meets next week. But market players do not expect any significant change from the world’s lone major central bank dove.

Governor Haruhiko Kuroda has repeatedly ruled out a near-term policy adjustment. Investors are speculating, however, that after Kuroda steps down in April, the BOJ may tweak its policy of yield curve control, which combines a negative short-term interest rate target with a pledge to cap the 10-year bond yield around 0%.
Source: Reuters

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