Developed markets: Our calls at a glance

Federal Reserve

Our call: 75bp in July, 50bp in September and November before switching to 25bp in December. Rate cuts in 2H23. Quantitative tightening (QT) to continue until rate cuts begin.

Rationale: To get inflation down quickly we would ideally like to see the supply-side capacity improve to meet strong demand in the US economy. However, supply chain strains, geopolitics/energy prices, and a lack of suitable workers mean this isn’t likely in the near term. Consequently, the onus is on the Fed to respond aggressively to dampen demand, but moving into restrictive territory means a rising chance of recession. Inflation could fall quickly from early next year, opening the door to rate cuts from summer 2023.

Risk to our call: Two-way. On the one hand, the tight labour market continues with rising wages making inflation stickier at high levels. Conversely, the economy reacts badly to rate hikes (the housing market is vulnerable) and recession prompts a lower peak and a more rapid reversal in Fed policy.

James Knightley

European Central Bank

Our call: Rate hikes totaling 100bp before the end of the year.

Rationale: Stubbornly high inflation and longer-term inflation projections above the 2% target have made a first rate hike overdue. Still, the very gradual (and slow) approach to normalising when other central banks act more determined and aggressively suggests a still divided ECB. Support within the ECB to end net asset purchases and the era of negative interest rates is strong but views on the timing and pace still differ. With a high risk of the eurozone and US economy falling into technical recession towards the end of the year and inflation coming down in 2023, there will be hardly any room for the ECB to deliver additional hikes in 2023.

Risk to our call: A faster and more severe recession could push the ECB to stop normalising after 75bp and could even trigger cuts in early 2023. On the other hand, positive growth surprises and little signs of inflation weakening could motivate the ECB to hike more aggressively this year and bring the refi to 2% in 2023.

Carsten Brzeski

Bank of England

Our call: 50bp rate hike in August, 25bp in September before a pause.

Rationale: It's a very close call on August's meeting, and in isolation there's not much in the latest data to suggest the Bank needs to move more aggressively. Core inflation looks like it is at, or close to, a peak (even if the headline will go to 11% in October), while unemployment has stopped falling. But the hawks are clearly worried about recent weakness in sterling, and the prospect of another 75bp Fed hike coupled with the fact that a 50bp rate hike is virtually priced for August, means we narrowly think that's the most likely outcome. Still, a 50bp hike – if it happens – is likely to be a one-off. We're not far from what's arguably neutral interest rate territory now (probably around 2%), and the Bank loses one of its biggest hawks after August, who will be replaced by a more dovish official. We still doubt the Bank rate will go as high as 3% or above, as markets are still pricing.

Risk to our call: If the Fed goes even more aggressively, or if core inflation moves unexpectedly higher in the coming months, then we could see more than one 50bp hike and a higher terminal rate.

James Smith

Bank of Japan

Our call: Bank of Japan will maintain an accommodative policy stance.

Rationale: CPI will stay above 2% until the end of 2022, but BoJ will downplay it as cost-push-driven inflation that will prove temporary. Market expectations of possible policy changes (at least broadening the long-end yield target) are still alive but are not going to materialise easily for a while.

Risk to our call: If signs of wage growth are detected and the sharp yen weakening continues over 135, then the bank could reconsider its policy stance, but that will become more likely when Governor Haruhiko Kuroda retires next April.

Min Joo Kang

Bank of Canada

Our call: 75bp hike in July with 50bp moves in September and October with a final 25bp hike in December.

Rationale: The Canadian economy is growing strongly with employment at record levels and inflation running at its fastest rate since January 1983. The Canadian economy’s red hot housing market and strong commodity focus are additional reasons for a strong central bank response. The Bank of Canada is worried about inflation expectations becoming unanchored and is implementing a swift run down in its balance sheet in combination with rapid interest rate increases.

Risks to our call: Predominantly to the upside given the positive economic outlook, especially if labour shortages become more of a problem and wage growth accelerates. This would add to upward pressure on home prices, which will also make the BoC nervous.

James Knightley

Reserve Bank of Australia

Our call: A further 25bp hike in July ahead of the 2Q CPI figures, then 50bp in August and another 25bp in September. 25bp hikes per month to the end of the year.

Rationale: The RBA found itself way short of where it needed to be (modestly restrictive) once it realised that inflation was not only higher than it had expected but would last longer. New inflation data is not due until after the next RBA meeting in July, so given their pledge to be “data-dependent”, a more cautious 25bp hike is warranted in July, but followed in August by 50bp as 2Q22 inflation is likely to post new year-on-year highs. Hikes should then revert back to 25bp in September.

Risk to our call: The RBA may feel that even without new inflation data, it is still sufficiently short of a modestly restrictive rate, that it makes more sense to keep hiking by 50bp in the near term until it reaches 2.5%, and then adopt a more data-dependent approach.

Rob Carnell

Riksbank

Our call: Another 50bp rate hike in September, followed by 25bp in November.

Rationale: The Riksbank is concerned that a tight labour market and forthcoming wage negotiations could result in a sustained pick-up in pay growth – and of course it is keeping a wary eye on the ECB's rate hike plans this summer. Swedish policymakers have also only two meetings left this year, compared to four at most other central banks, which means each one needs to count. We expect June's 50bp hike to be matched in September, but we're less sure about November given mounting global growth concerns. Sweden's housing market is also showing some cracks, which may also limit how far the Riksbank is willing to go.

Risk to our call: Given the Riksbank itself has signaled it wants to do a third 50bp rate hike in November, the risk is clearly that we get a little more tightening than we're now forecasting later this year.

James Smith

Norges Bank

Our call: 25bp rate hikes at the remaining four meetings this year.

Rationale: Higher inflation, aggressive tightening overseas, and a weaker krone prompted a 50bp hike at the June meeting, which came with a pre-commitment to another 25bp move in August. Norges Bank is effectively priming us for 50bp worth of tightening each quarter, but spread across the two quarterly meetings and until the deposit rate reaches the 3% area. With energy prices set to stay supported and the Fed determined for the time being to keep hiking aggressively to get inflation lower, it's hard to argue with Norges Bank's latest policy signals.

Risk to our call: If the Fed feels obliged to take the funds rate above 4%, then Norges Bank would probably step up the pace of tightening again.

James Smith

Swiss National Bank

Our call: After the 50bp rate hike in June, a 25bp hike is expected in September and another one at the end of the year is not excluded.

Rationale: After years of fighting it, the appreciation of the franc is now considered a positive element by the SNB as it moderates inflationary pressures, which explains the rate hike before the ECB in June. The SNB should therefore continue on its path and raise rates by 25bp in September, especially since we expect the ECB to have hiked by 75bp by then. A further increase at the end of the year would not be illogical to follow the ECB, but a strong Swiss franc could lead the SNB to stop sooner.

Risk to our call: A rapid slowdown in the eurozone and rising geopolitical risks could lead to a further appreciation of the Swiss franc, which would limit the number of rate hikes by the SNB.

Charlotte de Montpellier