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Posthaste: Betting on no more interest rate hikes? Not so fast

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Good Morning!

It’s a big week for central bank watchers. The United States Federal Reserve, European Central Bank and Bank of England will all make rate decisions, following the Bank of Canada last week.

Until recently predicting what a central bank in an advanced economy was going to do was simple, BofA Securities global economist Ethan Harris, said

“Most were six months or so behind the curve and would keep hiking until they caught up,” he said in a recent note. “Now with policy rates in the neighbourhood of neutral, forecasting is becoming a lot more nuanced.”

By all accounts, this has been an extraordinary cycle. A pandemic, then a war fanned inflation to levels not seen in decades. Central banks have responded, though some say a little late, with the most aggressive hiking cycle in recent history.

Now the pace of rate hikes is slowing and some central banks, such as the Bank of Canada, are signalling they are ready to pause.

“However, the war on inflation is not over and it would not be surprising if some banks paused only to start hiking later,” Harris said.

He backs up this view with three points. First, neutral rates — when interest rates are neither accommodative or restrictive — vary across countries and are difficult to pin down.

“To some degree central banks will only know what the neutral rate ‘was’ with the benefit of hindsight,” he said.

Second, inflation might not come down as much as central bankers hope. While goods inflation appears to have peaked with the easing of commodity prices and supply chain disruptions, wage and service price inflation could prove more sticky, he said. There is also the danger that inflation expectations stymie a return to targets.

“How would central banks respond?,” Harris said. “They could maintain high real rates for a longer period of time or, if the disinflation stall-zone is high enough, they could resume rate hikes.”

Third, investors have become used to the idea of smooth hiking cycles, but historically this has not always been the case. There are plenty of examples of pauses followed by additional hikes in the past and Harris believes high inflation makes this more likely today.

Norway’s Norges Bank is an example of a pause not meaning done. The first central bank to respond to rising inflation, it hiked in September 2021, six months earlier than its peers. Norges Bank hiked in December, paused in January and is now signalling one more hike in March.

The Bank of Canada, which has often followed the Fed, changed course this past week by being the first major central bank to signal a pause.

Some economists see its rate stopping at the current 4.5 per cent, but “the risk of more hikes is not going away quickly and cuts are nowhere in sight,” Harris said.

The Fed has gone from being one of the most dovish central banks to one of the most hawkish. BofA thinks it will make three more 25-bps hikes and that the market is pricing in rate cuts too early.

 

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There’s a new normal for turbulence in the world and the exceptionally high levels of uncertainty are hurting economic growth, says the International Monetary Fund.

The IMF’s World Uncertainty Index shows successive shocks shaking the global economy since 2016. In the chart above, there’s a spike when the U.K. voted to leave the European Union and another at the surprise outcome of the 2016 presidential race in the United States that saw Donald Trump elected. This was followed by a huge spike in uncertainty over U.S. trade tensions with China.

In 2020 it was the COVID-19 pandemic, followed by the shock of Russia’s invasion of Ukraine, which continues to be the main source of uncertainty in the world.

  • The emergency committee of the World Health Organization is expected to announce its decision on whether the COVID-19 pandemic remains a global emergency

  • The International Forum of Montreal hosts an armchair discussion with Innovation, Science and Industry Minister Francois-Philippe Champagne, and Thierry Breton, EU commissioner for the internal market

  • Dale Nally, Minister of Service Alberta and Red Tape Reduction, will share details about the 2021-22 Red Tape Reduction Annual Report

  • Earnings: CAE, Canaccord Genuity Group, GE Healthcare Technologies, Whirlpool

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If you’re 55 or older, a reverse mortgage might seem like an attractive option. As with every financial choice, however, it’s important to carefully weigh the pros and cons before entering into an agreement against your future home equity. Sandra Fry walks you through it.

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com, or hit reply to send us a note.