Fitch Ratings-London-10 November 2022: Global interest rates have risen more rapidly than expected in the past two months, and Federal Reserve and ECB policy rates are now likely to peak at a later date and higher level than anticipated in Fitch Ratings’ September 2022 Global Economic Outlook (GEO). Stubbornly high inflation outturns and a hardening of central bank resolve to bring inflation down make a pivot back towards rate cuts in 2023 unlikely.

Fitch now expects the Fed Funds rate to rise by 50bp to 4.5% at the December FOMC meeting and then by 25bp at each of the February and March 2023 meetings. We expect rates to remain at 5.0% through the rest of 2023.

The ECB’s Main Refinancing Operations (MRO) rate is now expected to rise by 50bp to 2.5% in December and then by a further 25bp at both the February and March 2023 Governing Council meetings. The MRO rate is expected to remain at 3% through the rest of 2023

The Bank of England (BOE) is now expected to raise its base rate by 50bp in December to 3.5% and then by a further 125bp to a peak of 4.75% by 2Q23. This is much higher than the 3% peak at end 2022 anticipated in the September GEO and partly reflects extreme volatility in UK financial markets in late September and early October, as discussed in our October UK Forecast Update.

The Fed, ECB and BOE have all raised interest rates rapidly over the past two months with all three increasing rates by an outsize 75bp at their latest meetings. Inflation is proving stubbornly high, despite global energy and food prices softening in recent months and a sharp easing in supply-chain pressures in global consumer goods markets.

Rising services inflation is a major concern as it signals inflationary pressures are becoming more embedded and self-reinforcing. Services inflation has risen to 6.7% in the US from 4.1% in January, to 6.1% from 3.3% in the UK and to 4.4% in the eurozone (from 2.3%). High services inflation reflects a range of components – including rapidly increasing rental inflation in the US – but over the longer-term services inflation is closely correlated with wage growth.

Wage growth is also elevated – particularly in the US and the UK – reflecting tight labour markets with historically low unemployment and a high ratio of job openings per unemployed person. Monetary tightening has made little progress so far in easing supply-demand imbalances in the labour market.

Against this backdrop, we think central banks are becoming more determined to take interest rates further into ‘restrictive’ levels (i.e. above their estimates of the ‘neutral’ rate, which neither adds to nor subtracts from aggregate demand) in the coming months and are likely to be nervous about a premature pivot to interest rate cuts in the latter part of 2023. Indeed, recent central bank commentary has emphasized that risks of ‘over-tightening’ monetary policy in the near term are outweighed by the risks of not tightening enough and allowing inflation to become more entrenched.

Fitch’s next GEO will be published in December and will reflect the faster pace of global rate rises in addition to other recent developments, including better-than-expected GDP outturns for 3Q22 in the eurozone.

Contact:

Brian Coulton
Chief Economist
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Fitch Ratings Limited
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Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@thefitchgroup.com

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