"Global Tightening Near End, One Fed Rate Hike Left...? Expected to Be a Key Signal (Summary)"

Analysis suggests that the tightening cycle of major central banks worldwide, including the U.S. Federal Reserve (Fed), is nearing its end. Global interest rates are expected to peak at 6% in the third quarter of this year and then fall to the high 4% range next year. In particular, if the Fed halts its rate hikes after the anticipated baby step (0.25 percentage point increase) in May, it will serve as an important 'pivot' signal for central banks around the world.

Bloomberg Economics, the economic research arm of Bloomberg, stated on the 10th (local time) that based on the benchmark interest rate forecasts of 23 central banks representing 90% of the global economy, “most central banks have already reached their peak rates or completed their hikes.” After one or two additional hikes in the U.S. and Europe, a global shift toward rate freezes or cuts is expected.

Accordingly, the timing of the Fed’s monetary policy shift, led by Chairman Jerome Powell, is seen as critical. Since beginning its rate hike cycle in March last year, the Fed has raised the upper bound of the U.S. benchmark interest rate to 5%.

Bloomberg Economics analyzed that the Fed’s decision to pause rate hikes will be perceived by most central banks as a kind of pivot signal. Subsequently, countries will begin preparations for rate cuts, solidifying a transition from the 'most aggressive tightening in decades' to 'easing.' Accordingly, at least 20 of the 23 central banks representing 90% of the global economy are expected to cut rates next year. Brazil, Indonesia, and others are likely to cut rates within this year. Additionally, global interest rates are projected to fall from 6% in the third quarter of this year to 4.9% by the end of next year.

By country, the Fed is expected to raise rates to 5.0?5.25% at the next Federal Open Market Committee (FOMC) meeting in May through an additional hike, then hold rates steady. It is forecasted to begin cutting rates next year, lowering them to 4.25%. Given recent developments such as the SVB crisis, increased lending regulations in the banking sector, and potential credit tightening, the market widely views the Fed’s tightening cycle as nearing its end. Anna Wong, an economist at Bloomberg Economics, said, “A 0.25 percentage point hike is expected in May,” adding, “Although a mild recession is likely by the end of 2023, the Fed will maintain peak-level rates throughout this year.”

For the European Central Bank (ECB), consecutive baby steps in May and June are expected to raise rates to 3.5%, followed by cuts to 2.5% by the end of next year. David Powell, an economist at Bloomberg Economics, explained, “The ECB faces the challenge of addressing high inflation, economic slowdown, and difficulties in the global banking sector,” adding, “It is a difficult balancing act for the ECB.” The Bank of England (BOE) is expected to maintain its current 4.25% rate until the end of the year, then lower it to 3.5% next year. The Bank of Canada, which is set to announce its rate decision on the 12th, is also expected to hold rates steady for two consecutive meetings. It is anticipated to keep the current 4.5% rate until year-end and cut to 3% next year. Additionally, rate cuts are expected within this year from the People’s Bank of China, the Bank of Mexico, and the Bank of Indonesia.

Bloomberg Economics forecasts that the Bank of Korea will maintain its current 3.50% rate throughout this year and lower it to 2.50% next year. Given signs of inflation stabilization in Korea, along with a sluggish real estate market and household debt concerns, further hikes are deemed difficult, so a wait-and-see stance is expected to continue for the time being. Two new members of the Monetary Policy Committee will participate starting from the May meeting.

Tom Orlik, chief economist at Bloomberg Economics, said, “China’s early reopening, Europe avoiding recession, and the overheated U.S. labor market all support arguments for rate hikes, but the collapses of Silicon Valley Bank (SVB) and Credit Suisse (CS) point in the opposite direction (rate cuts),” adding, “Currently, tightening arguments dominate. The peak in rates is near but has not yet been reached.”

Meanwhile, ahead of the May FOMC, this week’s events that could influence the Fed’s policy decisions are drawing attention. On the 12th, the U.S. Consumer Price Index (CPI) for March will be released. The March CPI is expected to rise 5.1% year-over-year, down from 6% the previous month. If inflation exceeds market expectations, concerns about Fed tightening will intensify. The market is particularly watching the persistently sticky core inflation. Core CPI is likely to outpace headline CPI due to continued strength in service prices. On the following days, the Producer Price Index (PPI) will be announced on the 13th, and the University of Michigan’s inflation expectations on the 14th.

Also, the minutes of the March FOMC meeting, released on the 12th, are attracting attention as it was the first FOMC after the SVB collapse. The background behind the Fed’s decision to raise rates by 0.25 percentage points despite rising concerns about a banking crisis and the Fed’s economic assessment will be closely examined. Additionally, Fed officials including Austin Goolsby, President of the Federal Reserve Bank of Chicago; Patrick Harker, President of the Philadelphia Fed; Neel Kashkari, President of the Minneapolis Fed; Thomas Barkin, President of the Richmond Fed; and Mary Daly, President of the San Francisco Fed, are scheduled to give speeches throughout the week.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, federal funds futures markets currently price in over a 70% probability that the Fed will implement a 0.25 percentage point 'baby step' rate hike at the May FOMC. The probability of a rate hold has dropped from the low 40% range a week ago to the high 20% range.

Additionally, the IMF and World Bank will hold their annual meetings in Washington this week. Finance ministers and central bank heads from major countries worldwide are expected to discuss economic growth, inflation, and other issues. World Bank President David Malpass announced that the global economic growth forecast for this year will be revised upward from 1.7% to 2.0%. The IMF will also release reports on global economic growth and financial stability on the 11th.

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