First signs of an end to interest rate hikes around the world?

Will the Bank of Canada set a path for the US Fedwhen it comes to interest rates? Will stopping the cycle of price increases in the north of the continent be an indicator for the southern neighbor? Where might interest rates in Europe be heading and when could the cycle end in the eurozone and how might markets react to it? We will try to find answers to these questions.

Yesterday, the Bank of Canada raised the main interest rate to 4,5%, which was in line with market expectations. However, in the communiqué to its decision, the BoC signaled the end of the cycle of aggressive monetary policy tightening in the event that the development of the economic situation is consistent with the central bank's perspective. The bank added that it is also continuing its policy of quantitative tightening to complement recent interest rate hikes.

Politicians emphasized that households continue to feel the pressure of higher inflation, as food and housing prices accelerated further, even as lower gasoline costs slowed inflation to 6,3% in December from a high of 8,1% in June. Still, short-term inflation expectations remain elevated, but are expected to decline significantly later in the year. Meanwhile, the bank estimates that the Canadian economy grew by 3,6% in 2022, but is likely to stall in the middle of this year before growth picks up again in the second half.

The Bank of Canada predicts that inflation will fall significantly this year. Lower energy prices, improving global supply conditions, and the impact of higher interest rates on demand are expected to bring CPI inflation down to around 3% by mid-2, returning to the 2024% target in XNUMX.

The market is convinced that this is the end of hikes

Looking at the valuation of FRA contracts, Canada becomes a country that can cut its main interest rate by at least 2023 basis points by the end of 50. So we are talking about a return in rates to 4,0 from the current 4,5%. Who could be next in line? Well, the United States. Here the market sees yet possibility of interest rate increases, but then there may be at least one cut of 25 basis points.

The UK is also targeted by investors on the interest rate market as a country that will cut the cost of money in 2023. While an increase is still possible in the near future, by the end of 2023 investors estimate that the Bank of England will cut the main interest rate by 25 basis points.

The eurozone breaks out of this picture. Here we can have a shift in relation to the aforementioned economies, and especially in relation to the American continent. In the eurozone, the market, but also decision-makers, talk about further hikes of 50 basis points each, and there is no valuation of a possible rate cut in 2023 on the horizon. The situation is similar in Australia, where after the recent inflation surprise there is no chance of a rate cut in 2023 – at least for now.

Bonds can breathe a sigh of relief?

In theory, the peak of the interest rate cycle or its proximity may determine the potential for the emergence of the bond phase of the market cycle. Although stocks, crypto or gold have recently attracted attention, it is worth remembering about bonds. Here, after a turbulent 2022, a greater calm may come. MOVE index measuring the volatility in this market has decreased to the level that was last seen in August 2022 and may be on the right track to possible further declines. Its value is currently almost 108 points, and the 200-week average is 77 points. Assuming that interest rates stop changing sharply, this could also lead to a calm in the bond market.