How far will the Fed and the Bank of England raise interest rates?

The Federal Reserve is expected to announce Wednesday after its policy meeting that it will raise its key rate by 0.5 percentage points, the first increase of this magnitude since 2000.

This aggressive measure is only the first of three now anticipated by investors, who believe that the US central bank will have to act quickly to fight against inflation, which remains at its highest level in 40 years. Fed Chairman Jay Powell said in April that it was appropriate “to move a little faster” to tighten monetary policy. Investors are betting that interest rates, currently hovering between 0.25 and 0.5%, will rise to 2.7% by the end of the year.

US government spending has slowed and financial conditions have started to tighten, but new sources of inflation – the war in Ukraine and new lockdowns in China – are expected to keep pressure on prices.

Next week, the US Department of Labor is expected to release employment figures for April. Economists polled by Bloomberg expect the United States to add 390,000 jobs, down from the previous month but still indicative of a robust and stable labor market. After the unexpected contraction of the US economy in the first quarter, the pressing question is whether the Fed can raise rates without hurting growth and plunging the US into a recession. Kate Duguid

Will the Bank of England drop dovish hints?

The Bank of England is almost universally expected to raise interest rates for the fourth consecutive meeting this week. The question is how much.

Contrary to the very large increase expected from the US Federal Reserve, the markets anticipate another increase of 0.25 percentage point in the United Kingdom, bringing the BoE’s benchmark rate to 1%.

With the cost of living crisis likely to dampen growth, a minority of BoE officials may choose to keep rates unchanged, according to Citi analysts, who expect two members of the rate-setting committee nine-member vote for no change, down from one in March.

“Significantly higher near-term inflation is likely to be juxtaposed with a sharp deterioration in economic momentum in 2022 and 2023, and intense disinflation thereafter,” said Citi economist Benjamin Nabarro. “Risks here appear to be skewed to the accommodative side. Nabarro expects the BoE to suspend its tightening cycle in August, contrary to market expectations for further increases.

If the BoE’s pace of tightening further lags the Fed, the pound could come under renewed pressure. It fell to its lowest level against the US dollar in nearly two years last week.

The BoE has previously indicated that it will consider starting to actively sell the bonds it has purchased under its quantitative easing program once rates hit 1%. The central bank could offer the first clues about the pace and timing of gilt sales this week, which could weigh on longer-term bonds, Citi said. Tommy Stubbington

Will Rising Brazilian Borrowing Costs Strengthen the Real?

Brazil’s central bank has been among the world’s most hawkish in the face of high inflation, raising its benchmark Selic interest rate from a historic low of 2% to 11.75% since March last year.

With price increases in Latin America’s biggest economy stuck in the double digits, the institution is expected to rise another percentage point on Wednesday.

The belief was bolstered by a preview reading of April inflation data in recent days. Although lower than expected, at an annual rate of 12%, it was the highest for this month in 27 years.

With the war in Ukraine stoking global inflationary pressures and the US Federal Reserve in tightening mode, monetary policymakers in Brasilia have to strike a fine balance.

Despite a slight improvement in forecasts of late, economists polled by the central bank recently gave an average forecast of just 0.6% economic growth for Brazil in 2022.

Any signal of further rate hikes to come could support the Brazilian real. After a torrid 2021, the currency has strengthened 13% against the dollar so far this year as investors seek higher-yielding assets, but it lost ground against the greenback during the month. latest. Michael Pooler

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