The concept of fighting inflation… The policy preferences of central banks to be more hawkish in the fight against inflation are at the forefront. The rise in interest rates and the withdrawal of global liquidity are also seen as a necessity due to the side-effect of overheating the economy of the high incentives put forward during the pandemic period. Because there is inflation to worry about right now, it is necessary to add a new term to the equation compared to previous tightening cycles. The economic incentives implemented in 2020 are evaluated by Central banks in terms of both reducing the impact of the pandemic, not warming up inflation and managing expectations. However, we have a dynamic crisis phenomenon, so a sequence with a very high margin of error is in the process of being passed.

 

Towards March on the Fed side… The January employment report was announced positive in all respects, creating a surprise according to the situation pointed out by the impact from Covid and leading employment indicators in the relevant months. Employment growth was broad-based in most industries, and upward revisions to the previous two months indicate that the recent momentum in hiring is still very strong. The phenomenon demonstrated by these positive data in the labor market causes a 50 basis point rate hike in March to fall into the pot. Accordingly, balance sheet reduction may start at an earlier date. The most important agenda of this week is CPI data; any strong economic activity data or any inflationary data will reveal the expectations for the acceleration of tightening to increase. The Fed will increase interest rates by at least 4, and the possibility of it extending to 7 is also being evaluated by the markets.

 

Fed’s implied policy rate and interest rate movements forecasts… Source: Bloomberg

 

ECB and others… The European Central Bank (ECB) did not change its monetary policy stance, but Lagarde’s statements at the press conference were a bit more hawkish than before. Lagarde did not repeat, as he had done before, that rate hikes in 2022 are “very unlikely”. The ECB President said the outlook will be discussed extensively in March with updated projections, but no pre-judgement can be made on the March estimates or the ECB’s decision. Accordingly, it seems that the markets have entered an early pricing phase and set expectations that the ECB may raise interest rates in the middle of this year. As it stands, it seems that a controlled tightening path will be entered by 2023 at the latest.

 

In BOE, on the other hand, more action-based hawkish movements are seen. The BOE raised the policy rate by 25 basis points to 0.50%, although some policymakers voted in favor of a larger increase of 50 basis points. The central bank raised its CPI inflation forecasts, saying it expects inflation to peak at 7.25% in April 2022. The BOE forecasts inflation to fall to 2.15% in two years and 1.6% in three years. Markets expect the overall interest rate in the UK to reach 1% by mid-year.

 

Conclusion? Policymakers are increasingly concerned about fixing inflation expectations regarding ever-increasing price pressures. With continued supply shortages and rising energy prices amid geopolitical tensions, inflation is likely to rise further in the near term, and there are mounting hawkish pricing trends that the Fed, Bank of England and ECB will tighten policy even faster. The tightening, which is likely to be spearheaded by the Fed in March, comes at a time when economic growth is slowing. In this environment, with the confidence that the easing of the pandemic waves will accelerate the economy again, Central banks give more importance to the price stability phenomenon.

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