Global central banks have begun decelerating their blistering pace of policy tightening, but this shouldn’t be taken as a newfound sign of dovishness. With rates set to move further into restrictive territory in 2023, it’s no longer the pace of tightening that is the focus for investors, but how high global policy rates rise and how long global central banks will hold them there.

After having raised rates by 75 basis points (bps) in recent meetings, the Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) each hiked by “only” 50 bps in December. However, this isn’t a precursor to a less hawkish stance – all three central banks have pledged to take rates further into restrictive territory.

Latest inflation readings have cemented the impression that price pressures are decelerating. Yet, with the Fed expecting PCE inflation to only fall to 3.1% by end-2023, the BOE forecasting inflation at 5.2%, and the ECB projecting 6.3%, further tightening is clearly required.

Indeed, the latest Fed dot plot sees policy rates rising a further 75 bps to 5.1% next year and remaining at that level throughout 2023. While neither the ECB nor BoE publish rate projections, markets expect policy rates to rise another 125 bps in the Eurozone and 100 bps in the UK, and no rate cuts in 2023.

Given the significant monetary tightening still to be digested, growth will likely be challenged in 2023—the BoE is forecasting recession next year, while the Fed and ECB project growth of only +0.5%. While the outlook seems daunting, opportunities will exist. Despite no rate cuts, traditional fixed income, with bond yields at their highest levels in a decade and recession risk rising, finally offers a compelling investment story.