Central bank rate hike cycles (forward estimates implied by OIS futures curve)
Basis points of hikes to policy rate
Source: Bloomberg Finance L.P. As of June 15, 2023.
Last month’s rundown
We continued to see divergence in policy in May and June as global central banks steadily approached the final stages in their onslaught against inflation. The Fed, after having led the most aggressive tightening campaign over the last year in terms of both size and speed, finally decided to pause rate hikes in June following 10 consecutive raises totaling 500bps. Despite the pause, the Fed’s updated rate forecast in June showed two more hikes in the economic projections before year-end.
In Europe and the U.K., policy makers are farther from the finish line. The European Central Bank continued its march forward in June, delivering a 25bps hike and an upgraded inflation forecast. Investors are expecting two more hikes this year, in line with the Bank’s forward guidance. The Bank of England is likely to follow suit with a 25bps hike at the meeting on June 22, but analysts expect this hike to be far from the last. Amid the U.K.’s improving growth outlook and elevated inflation, the futures market is now pricing in over 100bps more in hikes through year-end.
Though central banks are approaching the end of their tightening cycles, policymakers remain ready to pounce on any uptick in inflation, even if it means reigniting rate hikes after a pause. Bank of Canada and the Reserve Bank of Australia demonstrated this in May and June, as both banks hiked rates again after pausing for several months. The hikes caught markets off guard and demonstrated how unique and uncertain these tightening cycles are.
Meanwhile in Asia, central bank policy stands in sharp contrast. The Bank of Japan continues to stick with monetary easing, as does the People’s Bank of China (PBoC), despite global tightening efforts. The PBoC took stronger action in June to stimulate the economy amid slowing growth, cutting rates for the first time in ten months following increasingly weak economic data.
As we enter the second half of the year, there remains little consensus on the path forward amid policy divergence and mismatched market cycles. We anticipate macro themes to continue driving volatility through year-end as the economic impact of policy efforts sets in. We believe this wide dispersion will create regional opportunities for active managers.