The last central bank meetings of 2022 were eagerly awaited. Especially those of the European Central Bank (ECB) and the Federal Reserve of the United States (Fed), since the two monetary authorities had signaled that they would lower the pace of rising interest rates.With inflation coming down from peaks, the global economy reinforcing the signs of weakening and interest rates already at a restrictive level for the economy, one would expect a milder message from the central banks at the end of the year, paving the way for a less aggressive monetary policy in 2023.If that were the result of last week’s ECB and Fed meetings, the stock markets would have an open way to recover part of the strong losses of the year, bond interest rates should continue to ease and families and companies would look at 2023 with a less pessimistic perspectiveparticularly with regard to financing costs.
aggressive message
However, those who expected a Christmas present from Christine Lagarde and Jerome Powell, received a rather bitter present. Given that the two central banks slowed down the pace of interest rate hikes to 50 basis points, everything else was far more aggressive than investors and analysts were expecting..The message conveyed was very clear and can be summarized as follows: inflation persists at excessively high levels, which is why interest will continue to rise in 2023, even if this worsens the intensity of the recession that is expected for the economy the Eurozone and the United States next year. Communication is one of the most powerful monetary policy tools available to central banks. The indication that interest rates will continue to rise has an immediate impact on the financial conditions of households, companies and markets. If, afterwards, these indications materialize, it is a different story but, for now, they contribute to the main objective of central banks: to push inflation downRead more: Decoding the language of central banks
Inflation will remain high
The statements by the Fed and the ECB leave no room for doubt about the intentions of the two central banks in 2023 and what collide head-on with expectations of an easing of monetary policy next year.Jerome Powell stressed that the speed does not matter, but the level at which the Fed will set rates when the current cycle ends of aggravation and for how long the rate will remain at a restrictive level. The bar is already above 5% and the president of the Fed has ruled out any possibility of cutting interest rates while the central bank does not have the full confidence that inflation is moving towards the 2% target in a sustained manner.Inflation in the world’s largest economy fell in November for the fifth straight month and reached a December 2021 low. persists above 7%, more than three times above target🇧🇷 A level high enough for the Fed to lower its guard, not least because it estimates that the consumer price index will be growing at a year-on-year pace of 3.5% in 2023 and 2.5% in 2024. it’s even more complicated. Inflation dropped in November for the first time since June 2021 and remains above 10%. O ECB sees inflation in the Eurozone above 6% next year and above the 2% target by 2025.These pessimistic forecasts justify the aggressive statements made by the ECB in its communiqué. “O Governing Council considers that interest rates still have to increase significantly at a steady pace, towards reaching levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.” The central bank added that intends to “keep interest rates at restrictive levels” to cool down the economy and put pressure on inflationO. So that there are no doubts, Christine Lagarde made it clear that more increases of 50 basis points are expected in the next meetings.
ECB interest rates well above 3%
Since the current monetary policy tightening cycle began in July 2022, the ECB has already raised interest rates by 250 basis points (2.5 percentage points), in what is the most aggressive campaign in the still short history of the institution. After last Thursday’s meeting, which many economists consider the most relevant of the Lagarde era, it is clear that the ECB will not stop there. deposit rate is currently at 2% and economists’ expectations pointed to an increase of up to 2.5%, or 2.75%, in the second quarter of 2023. Investors, ever more aggressive, were discounting a terminal rate close to 3%. many different. Economists rushed to revise their forecasts and now point to a terminal rate around 3.5%, and some even admit that it could reach 4%. ECB interest rate futures also signal a spike around 3.5%. After two jumbo hikes (75 basis points), 50 basis points now looks like the “new normal”. Although the ECB stresses that decisions will be taken meeting by meeting and will depend on economic data, Lagarde signaled more 50 basis point rises and economists “bought” the idea. deposit rate will rise to 2.5% in February and 3% in March, after which the ECB opts for “traditional” increases of 25 basis points, while assessing the impact of its monetary policy on inflation and economic activity. This is the current view. But as we have seen in recent months, reality changes very quickly. For the ECB to reverse this more aggressive stance, it will be necessary to witness a accelerated decline in inflation, accompanied by a more pronounced economic slowdown.It seems implausible that this dynamic should take place, but it will hardly be visible in time to halt the worsening trend in interbank rates and sovereign bond yields. what is the increase the financing costs of households, companies and states🇧🇷
immediate consequences
Euribor rates jumped considerably the day after the ECB meeting, with indexes to 6 and 12 months reach new records of January 2009🇧🇷 The 12-month rate is already close to 3%, but the 6-month (2.569%) and 3-month (2.047%) rates still have a long way to go, and therefore an acceleration in increases is expected over the next few weeks. It is easy to see that families with housing loans will suffer a considerable increase in installments. Like companies. The same goes for states, as interest rates on bonds also rose considerably in reaction to the ECB’s more aggressive stance. In addition to signaling more interest rate hikes, the ECB also announced an important monetary policy decision. THE reduction of the portfolio of assets in the balance sheet of 5 billion euros will start from March (sooner than expected), which should put upward pressure on sovereign bond yields. Especially from the countries of southern Europe, which are more dependent on the intervention of the ECB in the debt market. In the stock markets, the reaction to the meetings of the Fed and the ECB were quite negative, annihilating the prospect of a sharp upward movement at the end of the year🇧🇷 And also degrading the prospects for 2023, a year that should continue to be marked, in an initial phase, by an escape from risk. The rise in inflation brought many disappointments to investors, families and companies in 2022. a clear message that 2023 won’t be much different.Read more: Interest rates are rising, what awaits us and what to do? 
Born in 1977, he has been a journalist since 1999. He started his career at Jornal de Negócios, where he spent more than 20 years, occupying various functions, always focusing on online. He is currently an independent journalist, subscribes to the daily Morning Call market newsletter and regularly collaborates with ECO. Graduated in Management at ISEG, he has a special interest in everything related to financial markets.