Inflation and interest rate forecast: will interest rates fall once inflation has peaked?
Many are watching interest rate predictions and inflation forecasts to see what might happen next. The US Federal Reserve’s interest rate actions set the tone for other economies. The Fed will only change direction once inflation is under control.
IN A FEW WORDS
Interest rate predictionsInterest rate forecastUS Federal Reserve Interest rateInflation forecast
4 min reading
The reversal in the interest rate cycle has been a key swing factor in 2022. It has determined the direction of financial markets and which sectors have done well. It is perhaps little wonder that investors are gripped by every statement from the Federal Reserve as they wait to see whether it might change course.
The Federal Reserve has been very clear about its position on inflation
It is prioritising beating inflation over any concerns about the US economy falling into recession. Fed Chair Jerome Powell said in August: “Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labour market conditions that benefit all. The burdens of high inflation fall heaviest on those who are least able to bear them.”
Most other developed markets are following the US. In November, The Bank of England raised the UK base rate by 75bps to 3% the day after a Federal Reserve interest rate increase of the same amount. The European Central Bank (ECB) also raised rates by 75bps at the end of October, bringing rates to 1.5%. Many Latin American countries had already raised rates, with their central banks well-versed in the problems of tackling high inflation.
The only major countries taking an alternative path are China, where monetary policy is loosening and Japan. In both cases inflationary pressures are minimal, largely imported from outside and allow their central banks more leeway.
The only way the Federal Reserve is going to change direction is if inflation looks to be comprehensively beaten
The Fed has made it clear that employment is central to its decision-making. And here the stats are bad, (or good, depending on who is looking at it). Jobs growth has remained very strong in the US, too strong for the Federal Reserve to consider a shift.
In November, Oxford Economics said in response to the last US jobs report: “Signs of cooling in the labour market did appear, as the unemployment rate rose and the payroll increase, while stronger than expected in October, downshifted from the gains in previous months. But wage increases continued to exceed expectations and sustain pressure on employers to raise prices.”
The Federal Reserve will also be looking at the housing market for signs of weakness. The market is cooling as higher mortgage rates deter potential buyers. In July, the S&P Case-Shiller index, which measures house prices in 20 US cities, dropped 0.44%, its first monthly decline in a decade.
To date, this has not been materially reflected in inflation figures, but growth is slowing – inflation peaked at 9.1% in June, but was 8.5% in July, 8.3% in August, 8.2% in September and 7.7% in October. However, a change in direction from the US central bank still looks some way off.
Inflationary pressures are weaker in the UK and Europe than the US with lower economic growth and less pressure on wages
In the UK, food, transport and energy prices have been the biggest contributing factors to inflation. A weak pound sterling is also pushing prices higher, as the cost of imported goods rises. However, the Bank of England’s November interest rate forecast suggests less rapid and extensive movement than in the US. Its inflation forecast is for a fall to start from the middle of next year with inflation back at the target rate of 2% within two years.
While some economists suggest that inflationary pressures are less entrenched in Europe – there were not the same government spending packages, for example – the region has been more vulnerable to the Ukrainian crisis and its impact on energy prices. High energy prices have spread through the economy, pushing up costs for businesses, which in turn, have pushed up prices for consumers. Nevertheless, the ECB interest rate prediction at the end of October was for rates to peak at 3% next year.
Interest rate predictions – will they start to fall once inflation has peaked?
Or will they just stop rising as fast? Central banks recognise the damage wrought by inflation and are likely to err on the side of caution. Investors shouldn’t expect an immediate reversal in rates even if the inflation cycle does start to turn. The world’s inflation problem isn’t over yet – and rising rates are likely to persist into 2023.
Whatever the market conditions the Fineco trading and investing platform has the tools, resources and a broad range of instruments to help to make the most of the opportunities.
Information or views expressed should not be taken as any kind of recommendation or forecast. All trading involves risks, losses can exceed deposits.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68.01% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Before trading CFDs, please read carefully the Key Information Documents (KIDs) available on the website finecobank.co.uk
Fineco Newsroom is a compilation of articles written by our editorial partners. Fineco is not responsible for an article's content and its accuracy nor for the information contained in the online articles linked.
These articles are provided for information only, these are not intended to be personal recommendations on financial instruments, products or financial strategies.
If you’re looking for this kind of information or support, you should seek advice from a qualified investment advisor.
Some of the articles you will find on the Newsroom feature data and information from past years. As per the very nature of the content we feature in this section of our website, some pieces of information provided might be not up to date and reliable anymore.
This advertising message is for promotional purposes only. To view all the terms and conditions for the advertised services, please refer to the fact sheets and documentation required under current regulations. All services require the client to open a Fineco current account. All products and services offered are dedicated to Fineco account.