A fork in the road A fork in the road http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\video\sign-crossroads-small.jpg April 28 2023 February 28 2023

A fork in the road

As the Fed slows rate hikes, the ECB is staying the course.

Published February 28 2023
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Video Transcript
Question: Will the Federal Reserve and European Central Bank diverge in their rate hike cycles?
Silvia Dall'Angelo: For a limited time, we'd like to see a bit of a divergence between the Federal Reserve and the European Central Bank. With the European Central Bank having started a bit later in its tightening cycle in July, 2022, while the Fed started earlier in March, 2022. Also, the ECB started from somewhat lower levels with a deposit rate of minus 0.5% at the beginning of 2022. So going forward, the ECB will probably hike some more, possibly to a terminal rate of between 3% and 3.5%. At the same time, the Fed will probably stop at around 5% and it is already close to that level. However, down the line, the divergence between monetary policy is unlikely to be sustained. If the U.S. falls into recession, even a mild one, typically the eurozone follows and monetary policy also will react accordingly.
Question: When may the ECB cut rates?
Silvia Dall'Angelo: It is definitely too soon to talk about an ECB easing cycle. Financial markets are expecting some ECB cuts towards the end of 2023, but the problem is that the inflation picture is probably not consistent with an ECB easing cycle starting in 2023. The ECB has a single mandate which is inflation at 2%. Headline inflation is now running way above the 2% target, wage inflation has picked up, the labor market in the eurozone is quite hot in a historical perspective, and therefore, the European Central Bank has no other choices than hiking rates in 2023. In our forecast, inflation in the eurozone will come down over 2023, but will remain above target, and if there is no recession, it is unlikely that the ECB will be in a position to start cutting rates in 2023.
Tags International/Global . Markets/Economy . Monetary Policy .

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