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Aegon AM’s Holdsworth anticipates a week of rate hikes (Fed, BoE, ECB)

Ahead of this week’s interest rate decisions from the Federal Reserve, Bank of England and European Central Bank, an Aegon representative has provided their thoughts.

Sandra Holdsworth, Head of Rates UK at Aegon Asset Management, said:

“In their final monetary policy meetings for the year, we see the Fed, the ECB and the Bank of England all raising interest rates. All three banks are likely to raise rates by another 0.5% so that rates in the US will be at 4.5% (using the upper bound for the Federal Funds rate), in Europe the deposit rate will be 2%, and in the UK the Bank rate will stand at 3.5%.

“In all three cases, rates will be at the highest levels since before the global financial crisis and substantially higher than 12 months ago. All three banks are also likely to push back on the idea that the fight against inflation is over. There are some encouraging signs that inflation rates are likely to fall in the coming months as energy price increases subside, but core inflation rates are likely to remain stickier for longer.

“The Fed and the ECB will also be releasing their latest set of economist forecasts and, in the case of the Fed, the combined estimates on how Fed members see interest rate policy evolving over 2023. The markets will be watching this closely to see whether the policy-makers are viewing likely policy differently to that priced into the markets. At present, the market is pricing peak rate in the US at around 4.9% in Q2 2023; in Europe, it is 2.8% again in Q2, and for the UK 4.5% mid-year. The markets will also be watching the ECB for an announcement regarding quantitative tightening and how that might affect peripheral European markets.   

“2023 will also be a year of significant challenge for central bankers. Inflationary pressures are subsiding very slowly, but rates of economic growth are now falling and recessions look likely in a number of economies. Despite the slowdown in economic activity, labour markets remain tight in a number of countries keeping upward pressure on core inflation as workers demand and receive higher wages, thus sustaining the higher prices. Until central bankers are confident that the outlook for inflation has weakened significantly, they are unlikely to deviate from their tighter policy stances.”

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