Weekly review 2 October 2023: Toward the interest rate peak and beyond

4.10.2023

The central banks have been busy holding their interest rate meetings in recent weeks. What kind of decisions were made at the meetings? And what kind of expectations will be placed on monetary policy in the future?

In recent weeks, the market situation has remained relatively calm. It is safe to say that the most important events have been the central banks’ interest rate meetings, which have been frequent occurrences around the world in recent weeks.

The changes that have taken place in the markets have mainly concerned interest rates, which have risen somewhat over the past few weeks. This, in turn, has led to a slight fall in the equity markets.

The current week looks relatively calm with regard to the data calendar. However, at least the US PMIs and the September labour market report are scheduled to be published.

Expectations of easing of monetary policy postponed

In practice, all main central banks have held their interest rate meetings in the course of the past few weeks. The US Fed, which is considered to be the most important of the main central banks, kept its policy rate intact, as expected. However, the central bank members raised their estimates of the future level of the policy rate due to stronger than expected economic development.

An interesting piece of news from the Fed’s meeting is also that the central bank significantly raised its economic growth forecast, especially for this year, from 1.0 per cent to 2.1 per cent. The Fed also raised its forecast for 2024, from 1.1 per cent to 1.5 per cent.

If the economy grows faster than expected, the inflationary pressure will also be higher. Therefore, the central bank assumes that the policy rate will be kept high for a while longer than previously expected. A decline in the interest rate level is thus not on the cards as yet.

On the other side of the Atlantic, the Bank of England also kept its policy rate unchanged – contrary to expectations, however. The general expectation in the markets was that the policy rate would rise by one increment, i.e. 0.25 percentage points. In the Nordics, the central banks of Sweden and Norway ended up raising their policy rates by one increment.

Generally speaking, the markets are currently expecting that all Western central banks will keep their policy rates unchanged or raise them slightly during the rest of the year. There are thus hardly any more significant interest rate hikes in store, and the focus has already shifted to when the first central banks will make their first interest rate cuts.

Previously, the markets expected the Fed to start lowering its policy rate before the European Central Bank. However, the situation has turned upside down, with economic development being stronger than expected in the USA and weaker than expected in Europe. Currently, the markets expect the ECB to be the one to make the first interest rate cut when the time eventually comes. That said, it will be a while before the expected first interest rate cut will take place and, as the past year’s events have shown, situations can change even dramatically within a short period of time.

Economic development in Europe weaker than expected

In terms of economic development, the USA and Europe have been seen taking diverging paths during the past year. In the USA, economic development has been stronger than expected, while in Europe it has been weaker than expected.

The US GDP growth forecast for the current year is around 2 per cent, which is a slightly more moderate growth rate than usual for the country. However, the forecast has changed dramatically in a relatively short period of time, as in early summer, the GDP growth rate forecast for the current year in the USA was around one per cent.

In Europe, however, there have been no such changes in the forecasts; instead, the forecasts have remained very stable over the past few months. At the moment, a GDP growth rate of less than one per cent is forecast for Europe for 2023, which means that the situation is more tragic in Europe than in the USA also in this respect.

However, positive news is in sight for the euro zone in terms of inflation, as inflation in the area moderated more than expected in September. According to preliminary information, core inflation, i.e. inflation less energy and food prices, was 4.5 per cent in September, so there is something to be happy about also in this part of the world.

 

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