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Dutch bank ING has said a slower rate hike cycle could lead to longer key rates after the Bank of England tempered expectations last week.
The BoE joined the Federal Reserve and European Central Bank last week in raising its key rate by a hefty 75 basis points, but, like its counterparts a week earlier, indicated that future gains would be smaller and that key interest rates are likely will peak lower than current market expectations.
ING said in a research note on Tuesday that this change of approach could mean that the base interest rate ‘will remain high for longer’, but that there would also be ‘less risk of an economic or financial accident’.
BoE chief economist Huw Pill: Bank has not declared a ‘victory against second-round effects’ of inflation
By raising key interest rates to 3 percent last week, the BoE’s Monetary Policy Committee eased expectations of future hikes, pushing market forecasts for the key rate peak to around 4.5 percent, from 5.25 percent. earlier.
Similarly, at the time of the Fed’s latest rate hike, Chairman Jerome Powell suggested that the pace of rate hikes could slow in the face of an impending recession.
Meanwhile, markets interpreted ECB President Christine Lagarde’s comments that a ‘substantial’ amount of policy tightening has already been done as an indication that European interest rates may not peak as high as expected.
But ING analysts warned of the expectation of lower overall rates, adding that a slower appreciation cycle “could lead to higher rates for longer.”
They said, ‘What was commonly described as a ‘pivot’ was in fact a signal that what we would describe as the ‘catch-up’ phase of this cycle is nearing its end.
Analysts at ING warned of the expectation of lower general rates, adding that a slower rise in key interest rates ‘could lead to higher rates for longer’
Tempered: The Bank of England report was based on market forecasts for yields on Oct. 25, but boss Andrew Bailey noted last week that expectations have fallen since then – key interest rates are now expected to spike below instead of above 5 percent
“During the ‘catch-up’ phase, central banks were almost on autopilot, taking big strides (up to 75 bps) as they left years, or even decades in the case of the European Central Bank, a very accommodative policy.
The new phase promises slower walks and more attention to the side effects of tightening. Because Fed Chair Powell struggled to emphasize, it doesn’t necessarily mean a lower final rate.”
Huw Pill, chief economist at the BoE, warned in a speech that the bank has not declared a “victory against second-round effects” of inflation.
Crash? The BoE expects inflation to fall sharply from the middle of next year
He added: ‘In an environment where headline inflation is high and [companies] pricing power is also high, there is a danger of a self-fulfilling and self-sustaining dynamic in wage prices and cost nexus.’
‘We did something’ [tightening] and there is more to do. That doesn’t mean we’ll move at a predetermined pace until the kingdom comes. At a certain point you have to think about which rate is appropriate.’
Inflation concerns in the UK mounted on Tuesday, after Kantar data showed supermarket price inflation had reached 14.7 percent. Markets are awaiting official data from the Office for National Statistics for October later this month.
But ING believes that the slower growth cycle will be a net gain for the fight against inflation and will also be positive for the economic outlook.
It said: “The Fed and other central banks could remain aggressive in the new phase of this tightening cycle if the numbers don’t come down fast enough.
The result, compared to a counterfactual where the walks are at a faster 75bp pace, means less risk of an economic or financial accident, but it also implies a more lengthy walking cycle.
“We dispute the story that this should lead to higher inflation expectations. In our view, this new phase also reduces the risk of an early end to this cycle and thus of a revival in inflation.
‘The result is, higher real rates, and for longer. That does not have to be negative for risk sentiment, if tail risks decrease as a result.’
Taking the opposite view, HSBC has downgraded its forecasts for UK interest rates in the current tightening cycle and now sees only two hikes.
It now forecasts a 50bp gain in December, followed by a 25bp gain in February, bringing the key interest rate to just 3.75%.
“Whether the BoE is ultimately right or not, short-term tightening is less likely,” HSBC analysts said in a note.
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