Fed leads pack of central banks in preparation for sharp hikes in policy rates

It is a really busy week for central bankers, who have been at war for months with a spurt in the cost of living. Policy decisions on key interest rates are due in the United States, the United Kingdom, Japan, Switzerland, Norway, Brazil, Philippines, and Indonesia.

Most central banks, except for Japan, are expected to tighten the monetary policy.

Let’s take a look at what the week has in store from the monetary policy angle:

First off, the Federal Reserve could hike its key rates by 75-to-100 basis points. Apart from the quantum of the rate increase, the dot plot of economic and rate projections, the pace of quantitative tightening and Fed Chair Jerome Powell’s speech would also be closely watched. The futures market is projecting the terminal rate at 4.5 percent.

Even as inflation seems to have peaked in several major economies, the rate of increase in prices is elevated because of the post-pandemic monetary and fiscal easing and the Russia-Ukraine war that has sent commodity prices up and stretched global supply chains.

United Kingdom in pursuit

The UK, emerging from a period of mourning for the late Queen Elizabeth II, will have a busy week for both monetary and fiscal policies.

While the Bank of England is expected to raise the policy rate by 50 basis points on Thursday, the mini-budget from the new UK chancellor Kwasi Kwarteng could see a fiscal boost in the form of the over £100-billion energy support package and £30 billion of tax cuts.

The curious case of Japan

Japan, the outlier when it comes to the monetary policy, has also seen its inflation rate spike. Still, its inflation is relatively low at 3 percent on-year in August. Bank of Japan won’t tighten policy, but will find it increasingly difficult to justify its ultra-easy monetary stance.

Still, the central bank will not hike policy rates or change its yield curve control policy anytime soon as inflation is not expected to persist above its 2 percent target for too long.

India to follow suit next week

Policymakers at the Reserve Bank of India’s rate-setting panel will meet after this week’s central bank decisions and in an environment where inflation remains uncomfortably high.

The Monetary Policy Committee’s three-day meeting will kick off on September 28 and rate-setters will likely decide the exact quantum of hike to be effected. Some economists expect the key policy rate to be raised by 35 basis points, while others expect a 50-basis-point increase, just like in the previous two policies.