The US is set for a sudden drop in inflation rate as the base effect driven by the elevated Consumer Price Index (CPI) in March 2022 occasioned by Russia’s invasion of Ukraine kicks in. However, this outlook does not deter the Fed, not even the fear of how a higher rate would heighten the current episodes of a bank collapse.
Despite renewed expectations of a pause to rate hike, the Federal Open Market Committee (FOMC) pushed interest rate higher by 25 basis points to 4.75%–5.00%, signaling that the cycle of hikes may be coming to an end or has ended going by fund rate projection. The Fed’s median expectation for the federal funds rate in 2023 is 5.1%, thus, invalidating the expectation of a cut this year. FED members, during public speeches, have continued to notify the market of the possibilities of higher rate hikes if needed in 2023.
In the United Kingdom, however, the Bank of England(BoE) pushed the policy rate up by another 25 basis points to 4.25% even though the contagion risk of a financial crisis extended to the country amid tighter economic conditions. Further tightening would be determined by a deceleration in inflationary pressure after a negative surprise of 10.4% in February 2023, halting the three months of steady deceleration and exceeding the general market expectation of 9.9%. Interestingly, the UK’s economy’s growth surprised to the upside at 0.3% in January, compared with expectations of 0.1%, provided some relief for policymakers on the downside of further tightening.
Analysts still believe that inflation will trend lower in Q2 2023, especially in advanced markets, giving investors some reasons to become optimistic again. This week, investors would keenly listen to Yellen Janet, Treasury Secretary, and John C. Williams, FOMC member, to glean some insight into policy direction going forward. The PCE price index (most preferred inflation gauge) will also be released on Thursday.
As the curtain of the first quarter closes, the global bourse was abashed with sentiment-dampening events and economic data. Nevertheless, the global equities ended March positively evidenced by the 1.7% m/m gain in the MSCI World Index. Consumer price level, which has been a focal point globally tapered in most economies. However, its knock-on effect bites harder. For one, most monetary authorities have continued to raise anchor rates while desolating the possibility of rate reversal data. Likewise, the impact on economic growth and credit creation is dreary and has spooked global financial system instability. During the month, the swift and successive collapse of US banks – Silicon Valley, Signature, and Silvergate Banks – after a run dampened confidence in the banking sector while putting a dent in investors’ sentiment. This prompted Moody’s to downgrade US banks’ outlook from stable to negative. To avert the contagion effect and halt a banking system failure, the authorities intervened by guaranteeing deposits and rolled out emergency lending programs at a low rate of 0.1ppt above market rates. However, this did not hinder the Fed from raising the rate by 25bps to a range of 4.75%- 5.0% even as CPI lowered to 6.0% from 6.4% in February.
