Take Two: Fed, ECB and BoE hike rates, IMF raises 2023 global growth forecast

What do you need to know?

The US Federal Reserve (Fed) slowed its pace of monetary tightening, increasing its benchmark rate by 25 basis points (bp) to a range of 4.5%-4.75% – as expected, and its smallest increase in almost a year. The central bank acknowledged that inflation had “eased somewhat” but that further rate hikes would likely be still appropriate. Fed Chair Jerome Powell told a press conference that if inflation does fall more quickly, this will be reflected in monetary policy. US annual inflation has fallen for six consecutive months, and at 6.5% in December was well below last June’s peak of 9.1%, though still far above the Fed’s 2% target.

Around the world

The European Central Bank (ECB) raised its benchmark interest rate by 50bp to 2.5% and signalled an equivalent move at its next meeting in March. ECB President Christine Lagarde said growth and inflation risks had become “more balanced” but that a fresh hike was still expected at the next meeting – new data showed Eurozone inflation fell to 8.5% in January from 9.2% the month before. The bloc’s economy expanded 0.1% in the fourth quarter (Q4), beating expectations of a 0.1% contraction. Meanwhile, the Bank of England also raised its base rate by 50bp, to 4%, as its governor Andrew Bailey warned it was “too soon to declare victory” over inflation.

Figure in focus: 2.9%

The International Monetary Fund (IMF) upgraded its global growth forecast for the year, to 2.9% from a projection of 2.7% in October. That would represent a drop from the 3.4% estimated for 2022. Growth is expected to climb again – to 3.1% – in 2024. The IMF said the more positive outlook reflected China’s re-opening, as well as unexpected “resilience” in demand from the US and Europe. It suggested the priority for global economies should remain achieving “sustained disinflation” as the balance of risks in the coming year leans towards the downside. It also forecast a gloomy outlook for the UK, which is likely to be the only G7 economy to shrink in 2023. 

Words of wisdom:

Green Deal Industrial Plan: A European Commission initiative to boost the competitiveness of European industry linked to net-zero climate goals that comes after a raft of subsidies introduced in the US last year. The plan, part of the European Green Deal, will direct investment aid, subsidies and tax credits to develop green technologies, with a principal pool of around €245bn in loans and grants. The commission will need to gather support for the plan from member states as it sets out more details but some concerns have already been raised that subsidies might only go to countries with already-strong fiscal capacity.

What’s coming up

On Tuesday the Reserve Bank of Australia meets to decide on interest rates; at its final meeting of 2022 it increased its cash rate by 25 basis points to 3.1%, its eighth consecutive hike. The Reserve Bank of India reconvenes for its own meeting on Wednesday. On Thursday leaders gather for a Special European Council Meeting focusing on the economy, migration and Ukraine crisis, while Brazil updates the market with its latest inflation numbers. China follows with its own inflation data on Friday when a preliminary estimate for UK fourth quarter economic growth is also published.