With one policy meeting to go in 2022, both the US Federal Reserve and Bank of England are on course to deliver their most aggressive tightening cycle in over 40 years. For the European Central Bank, only formed in 1998, 2022’s tightening cycle is already at a record high. Central banks are still expected to raise interest rates in the New Year so we can expect an even tighter rates environment in H1, 2023. However, the pace of adjustment should be more sedate as central banks will most likely want to understand what impact the hikes in 2022 have had on economic performance.
A return to policy changes of 0.25% clips should manifest itself in a less volatile rates environment too. However, until it’s clear that inflation is heading at least towards the level of official interest rates (let alone the lower 2% inflation target), the bias is going to be for rates to remain higher for longer. The risk of a higher rates environment at the end of 2023 cannot be discounted, even if the recent move lower in term rates suggests otherwise.
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