Following yesterday's decision by the US open market committee to raise interest rates by 0.5 percentage points, to a range of 4.25-4.5%, we could see a speech by Jerome Powell, Fed chairman. It seems to have caused declines in the markets. The main S&P 500 index (US500) closed yesterday at minus 0.5%. Today, we will know the decision of the Bank of England and the European Central Bank. What could we expect from them?
Source: Conotoxia MT5, US500, Daily
What did the Fed chairman say?
Announcements of further interest rate rises and continued reduction of the central bank's balance sheet may have been key. As Powell reported, commenting on the current macroeconomic situation: "...recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures."
During the speech, the Fed released new GDP growth forecasts for 2023-2025, as well as long-term estimates for the unemployment rate and inflation. The median forecasts for real GDP growth for these years are 0.5%, 1.6%, 1.8% and 1.8%, respectively, and the unemployment rate is expected to be 4.6% in 2023-2024 and 4.5% in 2025. The long-term estimate for the unemployment rate remained at 4.0%. Core inflation (excluding commodity and food prices) is estimated to be 3.5% in 2023, 2.5% in 2024 and 2.1% in 2025. The median for future interest rates was raised to 5.1% in 2023, 4.1% in 2024 and 3.1% in 2025.
What could we expect from the ECB's decision?
Currently, the reference rate in the euro area is at 2%. with CPI inflation at 10% year-on-year. The European Central Bank seems to have a looser approach to monetary policy since the onset of rising inflation. At present, the analysts' consensus is for a rate hike to 2.5%. This seems reasonable given how high levels of inflation we are at. It might even seem that, against the backdrop of high price rises, such a hike might even be symbolic. However, we would have to wait until Friday's CPI inflation readings, for which the current analyst consensus is 10% y/y. (unchanged).
Looking at the DAX index (DE40) of Europe's largest economy, it seems that there is still no extreme change from positive to negative among investors. Nevertheless, we could see a rebound. The index fell by 1% at the opening.
Source: Conotoxia MT5, DE40, Daily
Would the Central Bank of England surprise us?
The situation seems to be similar in the UK, where the benchmark rate is at 3%, with the latest CPI inflation reading at 10.7%. Analysts are forecasting that today the BoE would raise interest rates to 3.5%. However, in the case of this economy, we could see a gentle increase in the unemployment rate from the last three months, to 3.7%, which still seems a fairly safe figure, giving room for further monetary tightening.
Grzegorz Dróżdż, Junior Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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