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NEW YORK: The Federal Reserve (Fed) and Bank of England (BoE) may both unleash 75-basis point (bps) interest-rate hikes in the coming days in a show of aggression toward inflation, even in the face of mounting recession risks.
The transatlantic double act illustrates the trade-off confronting central banks as evidence of an impending global economic contraction becomes harder to ignore, even as inflation lingers.
For the Fed, the fourth such out-sized move soon will bring it to a crossroads. The damage to growth inflicted by policy tightening is no longer being masked by the buoyancy of the post-pandemic economy, while its success in taming inflation has yet to materialise.
The BoE’s situation on Thursday is even less comfortable as it delivers what would be the biggest UK rate hike since 1989.
Not only is the country probably already in a recession, but officials are also trying to reestablish the credibility of the UK’s framework after former Prime Minister Liz Truss’s unfunded fiscal plan led to a disastrous market crisis.
For each central bank, the week’s action is likely to be only a stepping stone toward even higher borrowing costs. Economists surveyed by Bloomberg reckoned Fed rates will reach 5% by March, while the BoE may keep raising to settle above 4%.
Then again, recession worries could still temper policy makers’ enthusiasm for forceful hiking. That’s what happened with the Bank of Canada, which hiked rates by a less-than-expected 50 bps.,
In the United States, many economists will look to the labour market for evidence of a deepening slowdown.
Non-farm payrolls due on Friday may show the economy added 190,000 jobs in October, the smallest addition since President Joe Biden’s administration began in January 2021.
“With the architects of the chaos no longer in power and the risk premium on UK assets fading, the pressure on the BoE to act aggressively has eased,” said Bloomberg economist Dan Hanson.
Elsewhere this week, a likely slowdown in eurozone growth, possible rate hikes from Norway to Australia, and a renewed surge in Turkish inflation will keep financial markets busy.
China releases its purchasing managers’ index or PMI reports for October soon, with a pullback expected.
Market watchers will closely scrutinise the release of intervention figures to see how much Japan spent to prop up the yen in October, as the currency still hovers near 32-year lows.
Australia’s central bank chief Philip Lowe is set to raise rates again soon as inflation continues to heat up faster than expected by economists.
Still, the Reserve Bank of Australia is more likely to opt for another quarter-percentage point hike, as it factors in concerns over the impact on households and businesses of raising rates too quickly.,
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