ECB, Fed and BoE Hawks Ponder Higher Rate Hikes

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UK Market Update

To combat elevated inflation, which is expected to reach 13% in Q4 2022, the Bank of England (BoE) raised interest rates by 50 basis points (bps) in August, the biggest jump since 1995. The bank also adjusted its economic outlook, now anticipating a recession to begin in 2022 and continue throughout 2023 due to soaring energy prices and the cost-of-living crisis. Data releases supported the more drastic August hike, as Q2 UK GDP (-0.1%) beat the expected -0.2%. CPI inflation of 10.1% was higher than the 9.8% expected, while the July jobs report showed 73,000 new jobs created, exceeding the anticipated 25,000 figure. The implied year-end UK interest rate rose from 2.62% on 1 August to 3.47% by month-end (see Chart of the Month).

Eurozone Market Update

In the eurozone, energy supply risks resulting in elevated inflation and declining growth have been a significant focus, alongside the reaction of the European Central Bank (ECB) policy response. Despite the announcement of the ECB’s Transmission Protection Instrument, concerns remain over support for peripheral states, particularly with the Italian election next month. Attention remains on the new leadership’s fiscal policy as the ECB works to balance the rising rate environment in both the core and peripheral states. Data showed continued high inflation, as eurozone consumer price inflation increased to 8.9% in August and is expected to rise above 10% in October. As measured by overnight index swaps, the implied year-end eurozone interest rate will be 1.61%, an increase of 74 bps over the month.

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