Decisions taken by central banks in march will be far more significant than this week’s February announcements, says Russell Silberston, strategist at NinetyOne.
With the US Federal Reserve (the Fed), the European Central Bank (ECB), and the Bank of England (BoE) all due to announce their latest interest rate decisions this week, markets are finely honed to analyse the outcomes.
However, these are largely nailed on, with 90% of economists surveyed by Bloomberg expecting a 0.25% increase from the Fed, 0.5% from the ECB and 0.5% from the BoE.
The reason for such high confidence is that policymakers have been very clear in their recent speeches that this is exactly what will happen.
The BoE, however, are a little more discordant, with some members thinking monetary policy is already too tight and others thinking that the UK has a domestically generated inflation problem that needs higher interest rates. If there is going to be a rate surprise this week, it will come from Threadneedle Street, where domestic economic weakness and a wide divergence of views could lead to a compromise 0.25% hike.
However, we would argue that investors should be looking beyond this week’s meetings to those occurring in March, as this is when things will get very interesting.
Why so? Faced with inflation well above mandated levels, central banks spent 2022 racing to lift monetary policy to levels that should be tight enough to slow growth, rebalance supply and demand, and thereby bring inflation back down again.
Following this week’s gatherings, we will be approaching the point where central banks can sit back and assess how their actions are panning out.
If by spring there are signs that interest rate hikes are biting, then we could see light at the end of this hiking cycle. Of course, that does not for one moment mean that policy will be reversed, but by signalling a pause, or at least signalling that a pause may be coming, March’s central bank meetings are going to be far more significant than February’s.
