Following more than a year of aggressive rate-hike cycles, a composite index of borrowing costs computed by Bloomberg Economics suggests that the global cost of borrowing will continue to rise this quarter, peaking at 6.25%, slightly above the previous quarter's projection of 6%.
However, this overall increase in interest rates masks an unusual divergence among global central banks.
Against the backdrop of soaring inflation, it is projected that the Federal Reserve, the European Central Bank, and the Bank of Canada will continue to raise interest rates in July. Meanwhile, the central banks of Japan and Russia may gradually reduce or even eliminate stimulus measures within the year. Central banks in India and South Africa are expected to hold steady, the Central Bank of Brazil is poised to increase liquidity, and the People's Bank of China is implementing more policies to support the economy.
Here are Bloomberg's quarterly predictions for interest rates of the ten major central banks:
Federal Reserve: Expected to raise rates twice more this year
By the end of 2023, Bloomberg Economics predicts that the federal funds rate will rise from the current 5.25% to 5.5%, and will fall back to 4.75% by the end of 2024. Despite pausing after ten consecutive rate hikes, Federal Reserve officials are expected to continue raising rates, with predictions for the interest rate to rise to 5.6% within the year. This suggests that the Federal Reserve might raise rates twice more this year by 25 basis points each time. According to Federal Reserve Chairman Jerome Powell last month, most officials predict higher interest rates, and if the economic performance meets expectations, then raising rates twice more would be "quite good".
European Central Bank: Rate hike in July almost a certainty, possibly 50 basis points within the year
Bloomberg Economics predicts that by the end of 2023, the current deposit rate of 3.5% will rise to 4%, and fall back to 3.25% by the end of 2024. The European Central Bank, after an unprecedented 400 basis points increase within a year, has made it clear that the rate hikes are not yet complete. As the ECB previously indicated, a rate hike in July seems certain.
People's Bank of China: Is there room for further rate cuts and RRR reductions?
Following its first rate cut in nearly a year in June, the People's Bank of China is expected to roll out more easing policies.
Bank of Japan: Abandon YCC policy in July?
Bloomberg Economics predicts that by the end of 2023, the policy interest rate will remain at -0.1%, and rise to 0% by the end of 2024. The new governor of the Bank of Japan, Kazunari Ueda's dovish stance has surprised the market, leading economists to delay their expectations for policy adjustments.
Bank of England: Significant rate hikes expected within the year, 125 basis points remaining in the current cycle?
With inflation exceeding expectations for the fourth consecutive month, investors believe that the most aggressive monetary tightening policy in over thirty years will continue.
Bank of Canada: July to see the last rate hike of the year?
Bloomberg Economics predicts that by the end of 2023, the overnight loan interest rate will rise from the current 4.75% to 5%.
Reserve Bank of India: Hold steady within the year?
Bloomberg Economics predicts that by the end of 2023, the repurchase rate will remain at the current 6.5%, and fall to 5.5% by the end of 2024.
Central Bank of Brazil: Lending surge imminent Bloomberg
Economics predicts that by the end of 2023, the Selic rate will rise from the current 6.5% to 7%, and fall to 6.5% by the end of 2024. As Brazil's inflation rate continues to exceed the upper limit of the target range, the central bank will likely tighten the monetary policy further to bring inflation under control. However, there are also predictions that there may be a surge in lending in the near future.
Central Bank of Russia: Exit from stimulus measures?
Bloomberg Economics predicts that by the end of 2023, the key rate will rise from the current 7.5% to 8%, and fall to 7.5% by the end of 2024. With inflationary pressures mounting and oil prices remaining high, the central bank may be poised to start gradually reducing stimulus measures.
South African Reserve Bank: Expected to hold steady
BloombergEconomics predicts that by the end of 2023, the repo rate will remain at the current 7%, and fall to 6.5% by the end of 2024. The South African Reserve Bank, under the leadership of Governor Lesetja Kganyago, has indicated that they will maintain the current interest rates despite external pressures.
While the diverging monetary policies across the globe may result in heightened volatility in the financial markets, it also offers opportunities for astute investors who are able to anticipate and react to these changes. The differing strategies of central banks will continue to have significant implications for global economies and investors in the coming months.
