After the rate decisions of Fed, BoE and ECB to raise policy rate last week, Goldman Sachs painted a picture for the end of the hike cycle this year as the policy playbook ahead looks set to diverge.
For the U.S. Federal Reserve, Goldman Sachs stated that more work must be done but a pause is in sight as the Fed stepped down its pace of rate hikes further this month from 50 basis points to 25.
The central bank’s statement indicates ongoing rate hikes will be appropriate, however, the Fed also acknowledged disinflation is underway and Fed’s chair Jerome Powell suggested further rate hikes will be determined meeting-by-meeting.
The Wall Street bank expected a pause in rate actions after a final hike in March if inflation falls further with only another 25 basis points to a terminal rate of 4.75-5% before coming to a stop.
Goldman Sachs said that the Monetary Policy Committee (MPC) of the Bank of England no longer judges that further increases in the Bank Rate may be required. Instead, the MPC is moving to a data-dependent approach and two of its nine members were in favor of a pause as soon as today. The UK’s policy outlook is complicated by anemic growth prospects, but upside inflation risks from weak labour supply. The firm expected a further 25bps rate rise is more likely than not for the meeting in March to a terminal rate at 4.25%.
As for the European Central Bank (ECB), Goldman Sachs expected another 50bps rate hike in March. However, ECB President Christine Lagarde indicated risks to the inflation outlook had become more balanced. As a result, despite there being more ground to cover on policy tightening, the outlook from the second quarter has turned more uncertain.
Goldman Sachs expected a terminal rate of 3.5% by the summer from the current 2.5%, but seeing risks as being skewed towards an earlier pause in tightening.