According to Jumana Saleheen, Vanguard’s chief European economist, the central banks’ fight against inflation is far from over.
That means markets are likely to remain vulnerable to additional shocks, such as the crisis that erupted in the UK sovereign debt in September, forcing the Bank of England to step in to calm markets.
“Interest rates have risen rapidly over the past six months and this pace is expected to continue,” Saleheen wrote in a note to clients Monday. “In our view, policy rates in these major economies will continue to rise through March 2023.”
Expectations for the direction of the Federal Reserve’s interest rate rose sharply in October (see chart), with it recently being forecast as likely to exceed 5% in 2023 from its current target range of 3% to 3.25% on a month-on-month basis in the future, swap rates have been fixed.
The red dot (above) is the “vanguard terminal interest rate,” or the level at which central bank interest rates will peak in this cycle of interest rate hikes.
The Bank of England’s policy rate is expected to reach close to 6% in 2023, while the European Central Bank’s policy rate should remain below 4%. These interest rates would be much higher than the existing policy rate and the “neutral rate” of around 2%, a level that is expected to neither encourage nor constrain major economies.
The reference rate for 10-year government bonds TMUBMUSD10Y,
is up towards 4% on Monday, near its highest level since 2008, according to Dow Jones Market Data. Its rise in each of the last 11 weeks has weighed on US stocks and made it increasingly expensive for consumers to borrow from big companies.
While the path of rates will ultimately depend “on future events and data,” Vanguard’s Saleheen said she also expects central banks to stick with plans to fight inflation with higher rates unless “something collapses” or one Market threat breaks “beyond the slowdown they control.” try to construct.”
Stocks ended higher on Monday after extreme volatility, which came after a key U.S. inflation read for September stayed above 8% year-on-year, daunting hopes of a faster decline towards the Fed’s 2% inflation target . The S&P 500 Index SPX,
up 2.7%, the Dow Jones Industrial Average DJIA,
rose 1.9% and the Nasdaq Composite Index COMP,
rose 3.4%, according to FactSet.
Read: The British Chancellor removes almost all major tax cuts from the mini-budget and cuts energy subsidies
See also: ‘This is not QE or QT. That’s none of that.’ Why the US Treasury is considering debt buybacks