After spending 2022 hiking borrowing costs by the most in four decades to restrain the surging price pressures they helped fan and then failed to forecast, Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde are among the international policymakers set to tighten further in the early months of this year.
Of the 21 other jurisdictions monitored by Bloomberg, 10 of them are expected to increase rates, nine are projected to cut and two are seen on hold.
That combination has Bloomberg Economics calculating its global gauge of rates will peak at 6% in the third quarter before ending 2023 at 5.8%. That would be the highest since 2001 and up from 5.2% at the start of the year.
But it also points to central banks diverging after virtually all shifted rates up in 2022, albeit with the notable exceptions of Japan and China. The latter is predicted to lower borrowing costs again this year, along with Canada, Russia and Brazil.
Decisions may become harder as rates move further into restrictive territory and risk constricting demand so much that economies topple into recessions. That’s the worry of bond traders who are increasingly skeptical of the ability of central banks to keep hiking and then hold tight.
“In 2022, with inflation high and rising, there was only one way for central banks to go and the biggest mistake investors could make was not factoring in enough hikes. In 2023, with inflation high but falling and recession looming, tradeoffs are starting to bite. Risks to the policy path are opening up below as well as above,” Tom Orlik, chief economist for Bloomberg Economics.
US Federal Reserve Chair Powell and his colleagues are on track to extend the Fed‘s most aggressive tightening cycle since the 1980s well into 2023.
