Outlook on Interest Rate Hikes by the Central Banks of the US and the UK This Week: Same Magnitude, Different Significance

This week, the Federal Reserve and the Bank of England will hold highly anticipated monetary policy meetings, with the market widely expecting both central banks to raise interest rates by 75 basis points. However, this same rate hike carries vastly different implications for the two central banks.

For the Federal Reserve, this will be the fourth consecutive 75 basis point rate hike, placing it at a critical decision point. The post-pandemic economic recovery is gradually being overshadowed by the negative effects of tightening policies, but inflation remains at a 40-year high. The Fed needs to weigh the trade-off between curbing inflation and avoiding an economic recession, with markets expecting it may lean more towards the latter.

In contrast, a 75 basis point rate hike would be the largest increase in interest rates for the Bank of England since 1989. The Bank of England seems more inclined to prioritize fighting inflation, even in the face of recession risks. With political turmoil temporarily subsiding, the Bank of England can focus on addressing the most severe inflation problem in 40 years.

The Federal Reserve may slow down the pace of interest rate hikes

Last week, the U.S. Treasury market rebounded from its decline, with the yield on the 10-year Treasury falling to around 4%. Some investors believe that the Federal Reserve's previous tightening policies may have led to an increased risk of economic recession, and therefore, the pace of interest rate hikes may slow in the future.

This view has received support from some Federal Reserve officials. Some dovish officials stated that the Federal Reserve should avoid overly aggressive rate hikes that lead to a "deliberately sluggish" economy, and that it is now time to start discussing slowing the pace of rate hikes.

However, inflationary pressures in the United States remain significant. Although the overall PCE price index slowed for three consecutive months in September, the core PCE price index has accelerated for two consecutive months. The consumer confidence index and inflation expectations have also increased.

Investors generally expect a 75 basis point rate hike in November, but there is disagreement about the magnitude of the rate hike in December. Some analysts believe that the Federal Reserve will only slow down the pace of rate hikes if inflation data shows a significant decrease.

At the same time, the market's expectation of the Federal Reserve hinting at a slowdown in interest rate hikes is heating up. Investors are starting to increase their holdings of long-term government bonds, anticipating a significant slowdown in economic growth, and that the Federal Reserve may begin to cut interest rates next year.

The Bank of England Faces a More Complex Situation

The Bank of England's interest rate meeting this week faces a more complicated situation as the government has delayed the announcement of its fiscal plan. The market widely expects the Bank of England to raise interest rates by 75 basis points, which would be the largest increase in 33 years.

Compared to the Federal Reserve, the situation for the Bank of England is more challenging. First, the UK's inflation rate has reached 10%, returning to a 40-year high. Second, the UK economy may have already fallen into recession, which is expected to last until 2024.

In this round of global interest rate hikes, although the Bank of England started raising rates earlier, the magnitude of the increases is behind that of the Federal Reserve and the European Central Bank. This has made the situation for the Bank of England even more awkward.

In addition, former Prime Minister Truss's radical tax cut plan once triggered a crisis in the UK bond market, and the new government still needs to rebuild credibility. With political stability, the UK bond market has recently rebounded, providing the Central Bank with more policy space.

Overall, the Bank of England faces a difficult task of balancing the fight against inflation and avoiding a deep economic recession. This week's interest rate decision will be an important indicator of how the Bank of England responds to this challenge.