Central banks may find it hard to fight the Fed

While the Bank of Canada surprised to the downside with its latest interest-rate-setting decision, the U.S. Federal Reserve’s 75-basis-point rate hike on Wednesday indicates interest rates may be heading higher than expected, suggests National Bank Financial Inc. (NBF).

In a new report, NBF noted that, while recent monetary policy action by various smaller central banks, including the Bank of Canada, hints at a slowing of rate hikes, yesterday’s Fed move bucks that trend.

Alongside the Bank of Canada’s recent below-consensus rate hike, Norway’s Norges Bank surprised to the downside too, the Reserve Bank of Australia delivered a modest 25-basis-point hike following a smaller-than-expected move in October, and, while the Bank of England and the European Central Bank handed down 75-basis-point hikes, their decisions reportedly featured dissenters who favoured smaller moves.

“Clearly, many central bankers are trying to temper expectations for how high policy rates will ultimately climb, as some opt for smaller-than-expected hikes while others adopt more cautious guidance,” NBF said. “The problem, of course, is that global central banking is not a democracy.”

The issue is that the outlier is the powerful U.S. Fed, which unanimously hiked rates 75 basis points and, according to the report, may end up taking rates above 5%.

This, in turn, may create pressure on other central bankers to hike more than they otherwise would, given the potential impact of higher U.S. rates on their currencies against the U.S. dollar.

“Currency considerations may not be the most important factor in guiding where terminal rates settle, but as we’ve heard from some central bankers, the big dollar can’t be ignored,” NBF said.

“Buckle up non-Fed policy-makers,” it concluded. “You may be now prepping for an end to rate hikes, but the gravitational pull of a still-hawkish FOMC [Federal Open Market Committee] might keep your rates (and our rate forecasts) moving higher, albeit begrudgingly.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.