The Strategist

Major central banks already at peak rates?

After a relentless rise over the past 18 months, it seems like key interest rates may finally be close to peaking. At least that is what it looks like after the latest round of key Western central bank rate-setting decisions.

Simon Weiss, LGT
Tempo di lettura
10 minuto
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The past few weeks have seen another round of central bank decisions that, in retrospect, were not without an element of surprise. The Swiss National Bank (SNB), for example, defied the broad consensus and market expectations for a final rate hike to 2.00%, leaving its key interest rate unchanged at 1.75%. With recent data pointing to some easing of inflationary pressures, the SNB board of directors considers the current monetary policy stance restrictive enough. As the latest data seem to confirm the trend of diminishing inflationary pressures in Switzerland, we think a further rate hike has become rather unlikely.

The Bank of England (BoE) surprised in a similar way, but the reason for keeping rates on hold was somewhat different, as the risk of over-tightening and damaging an already weak economy seemed to be the deciding factor.

The last move was most likely also made by the European Central Bank (ECB), which delivered another 25 basis points hike while focusing on a dovish communication. 

Or is it not that far yet?

Our interpretation is that we have most likely seen the last move in this hiking cycle. And while the Federal Reserve (Fed) in the US took no further action at its September meeting, leaving interest rates unchanged, the Federal Open Market Committee (FOMC) did surprise with the tone of its communication, which was more hawkish than markets had expected. This signalled that policymakers are prepared to keep interest rates higher for longer in order to bring down inflation and kept the door open for another rate hike, even if the probability is rather low from today's perspective.

One thing is certain - interest rates remain key

While we cannot completely rule out the possibility of a sudden reacceleration in inflationary trends, the picture that has emerged in recent months reinforces our view that we have reached the peak in the evolution of key interest rates of major Western central banks. We therefore expect the market's focus to return to the question discussed at the beginning of the year: when will central banks begin to pivot and start cutting rates?