A number of major central banks held their policy meetings last week, to decide what course of action to take for the beginning of the year. 2023 was widely expected to be a year of recession for a number of countries. At the beginning of January, the head of the IMF Kristalina Georgieva said that the IMF expected one third of the global economy to be in a recession during the year.
Subsequently, the IMF released the January update of its World Economic Outlook, initially released in October 2022, titled “Inflation Peaking Amid Low Growth”. In effect, the January update showed an upward revision to the growth forecasts made for a number of countries, and for the global economy as a whole.
Meanwhile, inflation seems to have peaked in some key economies, such as the US (where inflation decreased from 9.1% in June 2022 to 6.5% recently), the Eurozone (from 10.6% in October 2022 to 8.5%), the UK (from 11.1% in October 2022, to 10.5%) and Canada (from 8.1% in June 2022, to 6.3%).
So, this year of stagflation, as we described in our 2023 outlook, appears to be a bit milder than initially anticipated, with slightly higher growth and slightly lower inflation. Still, one needs to remain vigilant about some ongoing risks, for example that of a new Russian offensive in Ukraine, which could bring the global economy to a standstill once again.
How have central banks reacted to this updated macroeconomic environment? The Bank of Canada was the first to announce the outcome of its policy meeting at the end of January. The Bank increased its policy rate by 25bps to 4.5%, while continuing its Quantitative Tightening program. But, most importantly, it announced that “[the] Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases”. In a nutshell, it announced a pause in its tightening cycle.
Last week, it was the turn of the Federal Reserve, the Bank of England and the European Central Bank to decide upon their own courses of action. The Fed announced another 25bps increase of its target range, to 4.5-4.75%, and two more rate increases in March and May. As discussed in our in-depth review, during the press conference Chair Jay Powell sounded as hawkish as one can be given the circumstances, saying that the dis-inflation period has just begun and that there is still “a long way to go,” among other messages. The market totally disregarded the hawkish components of Powell’s press release, and celebrated the fact that the end of the tightening cycle is finally in sight. Funnily enough, the market had disregarded the same message for months; it had ignored the message that the peak of the cycle was in fact near, focusing instead only on the further rate increases and the rise in the terminal rate expected by the Fed.
A similar fate occurred for the ECB, which increased its deposit rate by 50bps to 2.50% and announced another 50bps hike in March, while further specifying the criteria for its QT starting in March. Lagarde also said that there is still ground to cover and that further hikes are likely after March. But the market celebrated the statement in which the ECB says that, after March, it will “evaluate the subsequent path of its monetary policy”, as this future re-evaluation was already the end of the tightening cycle.
The Bank of England chose an approach similar to the Bank of Canada’s. It raised its repo rate by 50bps to 4.0%, but then indicated what seems to be a likely pause for the months ahead, without making further mentions of the QT program. Again, this generated euphoria in the market.
To conclude, it seems that the macroeconomic outlook is less malign than initially anticipated, and central banks are announcing a pause, or signalling an imminent end of, their tightening cycles. This clearly makes market participants very happy. Hopefully bad news will not intervene too soon to interrupt this moment of relief.
