Ending a year of rapid transition to tighter monetary policy, the major central banks this week made exactly the decisions that the markets and we were expecting. The Fed, the ECB and the Bank of England raised their key base rates by 50 basis points. However, all three surprised us. Fed forecasts and guidance from the ECB and the Bank of England suggest that all three countries will tighten their policies even more early next year, more than we have expected so far. We adjust our forecasts accordingly, so we add an additional 25 bps rate hike by the Fed and the BoE, as well as a 50 bps hike. for the ECB.

Following the median forecast of US Bank officials, they now expect to raise their key rate target range to 5.0%-5.25% by the end of next year, compared to their previous estimate of 4.5%-4.75%. We continue to believe that a fall in inflation to 3% and a rise in unemployment to levels well above 4.5% by the end of 2023 will eventually trigger a shift to less restrictive policies. For now, however, the Fed is clearly intent on raising borrowing costs. We now estimate that he will raise interest rates by 75 bp. instead of 50 m.v. and ranging from 5.0% to 5.25% in the first three meetings in 2023, followed by a decline of 25 bps at the end of 2023 and five more cuts of 25 bps. in 2024. Now, together with the ECB, it intends to raise its key interest rate at a steady pace in more than one of the next few meetings. In addition to the 50bp rate hike we expect on February 2nd, we are now adding an additional 50bp hike. March 16th. This brings our forecast closer to 3.5% (from 3.0%). However, at such a high level, the ECB will likely have to cut interest rates again when inflation falls closer to the 2% target in 2024. We forecast two cuts of 25bp each. each in mid-2024. Finally, the Bank of England is expected to raise rates by 25 bps. in February, which will bring the benchmark interest rate to a cap of 3.75%, and we estimate there will be cuts in the second half of 2023, as in 2024, to bring the cost of borrowing to 3%.

* Messrs. Holger Schmieding, Callum Pickering and Salomon Fiedler are economists at Berenberg Bank.