Frederik Ducrozet, Head of Macroeconomic Research Pictet Wealth Management.

Central bank pivot delayed, but still incoming

We ‘mark-to-market’ our policy rates forecasts taking into account a more resilient labour market in the US, and the central banks’ hawkish reaction function. US consumer inflation eased only modestly to 8.3% in August amid persistent core price pressures, leaving the Federal Reserve (Fed) on high alert for now. A third 75bp ‘jumbo’ rate hike is likely on 21 September, followed by 50bp in November and 25bp in December, pushing the Fed’s terminal rate to 4.0% (versus our previous expectation of 3.25%). As growth and employment start to deteriorate by the turn of the year, we think the Fed will cease hiking in 2023, but not lower rates again.

A delayed Fed pivot may create room for other central banks to tighten their policy stance for longer – especially in Europe where inflation has not peaked yet. We expect the European Central Bank (ECB) to front-load more rate hikes, bringing the deposit rate to 2.0% by year-end (previously: 1.50%) and the Swiss National Bank (SNB) to catch up faster to 1.25% (previously: 0.75%).