Week Ahead: Central banks to battle inflation with more rate hikes

Updated September 3, 2022

It’s an action-packed week ahead featuring major G10 central bank meetings, the announcement of the next UK Prime Minister and comments by Fed Chair Powell ahead of the Fed’s “quiet period” into the FOMC meeting on 21 September.  Central bankers are endeavouring to become more forceful to get a grip on record high inflation. Powell’s speech should keep the dollar bid as the world’s most important central bank will continue to front-load hikes after Friday’s “Goldilocks” NFP report. Gold was offered a slight reprieve at the end of last week as it closes in on key support around $1680.

The ECB is expected to take the deposit rate into positive territory for the first time since 2011 at its meeting on Thursday. Markets have been swayed by the recent heavy hawkish rhetoric from numerous ECB officials who are looking for a jumbo-sized 75 basis point rate hike. A compromise half-point rise would certainly keep the door open for further rate moves. But the economy is set to be hit by a winter recession which may mean the window for additional big rate hikes is narrowing.

Tuesday should see the RBA lift the cash rate by 50 basis points to 2.35% and into the “neutral zone”. A record low jobless rate and rampant inflation points to more hikes on the horizon. That said, any temporary boost to the aussie may be short lived. Soft risk sentiment and China’s slowdown loom over the commodity-influenced currency.   

Policymakers at the Bank of Canada surprised markets with a full percentage point rate hike at its last meeting. A 75-basis point hike is forecast on Wednesday.  This will take the policy rate to 3.25% and so-called “restrictive territory”. Some analysts are speculating that this may be the last hike by the bank in this tightening cycle. We will be on the lookout for any forward-looking language that may hint at a “pivot”. A refusal to pre-commit to further action could hurt the Canadian dollar.

Here are the key risk events on the calendar:

Major risk events of the week

05 September, Monday:

UK Prime Minister Announcement: The winner of the Conservative Party leadership contest and next UK Prime Minister will be announced in Westminster at 12.30pm. Liz Truss, the overwhelming favourite, is expected to deliver her first speech at 4pm on Tuesday with a rumoured emergency budget on 21 September. Analysts say her mooted policies will push inflation higher and cause the Bank of England to hike rates further.

06 September 2022, Tuesday:

-RBA Meeting: Most analysts expect the RBA to deliver a fourth straight 50bp hike, lifting the cash rate to 2.35% and into the “neutral zone”. Headline inflation is forecast to climb over 7% by year end, the labour market is the tightest in 50 years and wage growth is accelerating. Rates are seen rising to 3.10% by year end and peaking at 3.35% in February 2023.

07 September 2022, Wednesday:

The Bank of Canada Meeting: The bank is set to raise rates by 75bp, taking the policy rate to 3.25%. It surprised markets at its last meeting by hiking by a full percentage point. Recent data has been mixed with inflation showing signs of easing and Q2 GDP missing estimates. Markets price in a further 50bps of tightening by year-end. Focus will be on forward-looking language.

08 September 2022, Thursday:

ECB Meeting: The ECB is set to hike the Deposit rate and take it into positive territory for the first time in over a decade. The hotter-than-expected August inflation print and recent hawkish rhetoric by policymakers have seen markets push the chance of a 75bp rate rise to above 80%. New staff projections will be scrutinised to detect the ECB’s reaction function. The euro’s battle with parity may be decided if President Lagarde and the new economic forecasts point to a marked slowdown.

Fed Chair Powell Speech: Jerome Powell is set to speak at a monetary policy conference in Washington. This will be the last chance for him to shift rate expectations ahead of the blackout period for Fed officials before the 21 September FOMC meeting. Analysts expect him to remain hawkish with more rate hikes to counter surging inflation. This should underpin the greenback as it looks to move above 110 on the DXY.

09 September 2022, Friday:

Canada Jobs: Economists forecast that net employment is likely to rise after two straight months of job declines. The unemployment rate inched down to another record low at 4.9% in July. Analysts say the tightest labour market in generations is likely to remain. But while the BoC is fighting inflation and raising rates, there will be slowing job market momentum.   

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