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The Federal Reserve is widely expected to leave US interest rates steady on Wednesday but the central bank should offer investors insight on the likely path ahead.
Policymakers on the Federal Open Market Committee have indicated they do not expect to raise interest rates at the conclusion of the two-day meeting. That would mark the second consecutive pause in interest rates since the Fed lifted rates to a range of 5.25 per cent to 5 per cent in July. Traders in the futures market are only pricing in a 2 per cent chance of a quarter percentage point increase.
But investors and economists will be closely watching for any hint that rates may rise again in coming months. US economic data has been strong and inflation has picked up but futures markets are still only pricing in a roughly 20 per cent chance of an increase in December.
That is in part because of the run-up in Treasury yields since the Fed’s September meeting. The 10-year yield this week surpassed 5 per cent for the first time since 2007, raising borrowing costs with it. Fed officials have been clear that the rise in yields may be doing some of the bank’s work for it, obviating the need for further increases. Kate Duguid
Is the Bank of England done raising interest rates?
Investors are confident that the Bank of England will keep interest rates steady at 5.25 per cent on Thursday but the outlook is far from clear cut.
The Monetary Policy Committee, like the Fed, is expected to hold rates steady in consecutive meetings after narrowly deciding against another quarter percentage point rise in September.
Since then yields on gilts have risen sharply, tightening financial conditions. Both 30- and 10-year gilt yields have each risen by about 0.3 percentage points. Analysts say uncertainty around the conflict in the Middle East is also likely to make the BoE more cautious.
“Rising international bond yields and geopolitical concerns — notwithstanding the potential impact on energy prices of the latter — suggest against higher rates,” said George Buckley, research analyst at Nomura.
Moreover there are indications that UK economic growth is slowing. Analysts say monthly gross domestic product figures are on track for a small third quarter contraction, compared with a BoE estimate of 0.1 per cent growth, and retail sales came in weaker than expected in September.
Set against that, the outlook for inflation is also mixed. The UK’s inflation rate did not fall last month, as economists had expected, holding steady at an annual rate of 6.7 per cent. Even so, it was still lower than the central bank had forecast in August. The BoE has invoked the image of Cape Town’s Table Mountain for interest rates — a steep climb, then an extended flat top.
“We expect that the MPC will follow the ‘Table Mountain’ strategy for returning inflation to target outlined first by chief economist Huw Pill,” said Sandra Horsfield, economist at Investec.
Swaps markets place a probability of only 8 per cent that the BoE will lift rates next week, and a 33 per cent chance of one more rate rise by February next year. Mary McDougall
Will eurozone inflation reach 3%?
Inflation in the eurozone is expected to drop sharply on Tuesday but investors will be looking for supplementary indications that the decline is not temporary.
The harmonised index of prices for the 20-country bloc is expected to drop from 4.3 per cent in September to 3.4 per cent in October, the slowest annual price growth in the region for more than two years, according to economists polled by Reuters.
That is largely down to falling energy costs. The European Commission’s weekly pump price data shows that petrol and diesel prices are both down so far in October. Although the war between Hamas and Israel has pushed prices higher again, this is unlikely to feed into the latest monthly data.
The report comes after the European Central Bank warned on October 26 that inflation was still expected to stay “too high for too long” with domestic price pressures remaining “strong”.
The bank held rates at 4 per cent, its first rate pause following 10 consecutive rate rises, as it tried to push inflation back to its target of 2 per cent annual growth.
Investors’ focus will be on core inflation, which strips out volatile food and energy prices and is the ECB’s preferred measure of underlying price pressures. In September, core inflation slowed more sharply than expected, to 4.5 per cent, but there was still a worry that the figure could have been a fluke driven by monthly volatility.
But Oliver Rakau, chief Germany economist at Oxford Economics, said some early indications from Germany hint that core prices continued to slow in October “possibly more sharply than expected”.
Analysts say the inflation data will be key for any plans to stop reinvestments under the ECB’s pandemic emergency purchase programme, scheduled to continue until the end of 2024.
“We think they can’t do that until they’ve declared victory on inflation, and our forecast is that it will be at 2.1 per cent in March next year,” said Andrzej Szczepaniak, an economist at Nomura. Mary McDougall
