Inflation range in view, but is it close enough to stop further rate hikes?

The rate hiking regimes of central banks around the world are on the verge of being finalised according to global money manager Neuberger Berman, with inflation set to fall into preferred target bands by 2024 despite being stuck in neutral while economies teeter on the edge of their cyclical tipping point.

Inflation has fallen in the US from a high of 9 per cent last year to 4 per cent this May, with the same disinflationary trend seen across Europe and the Asia-pacific. The steepest rate hiking program in history has largely done its job, with prices for good and services softening in most major economies around the world.

And while inflation does seem to be in a transitory phase, having been stuck at 4 per cent in the US for 5 months now, and many central banks still see the need to increase cash rates, Neuberger Berman says the downward trend for inflation is set to continue.

“Despite hawkish messaging from central banks, inflation has generally been coming in as expected – slightly weaker for headline numbers but stable for core inflation,” Neuberger Berman stated in its Q3 Fixed Income Investment Outlook report. “We believe that inflation will slowly step down over the remainder of the year.”

Softening inflation, however, may not translate to an immediate halt on interest rate rises, with the privately owned investment giant expecting a lag in the response as central banks play it safe and look for a comfortable buffer before curbing increases.

“Despite ongoing disinflation, short-term price trends are keeping central banks ‘on the front foot’ as they seek to drive inflation back toward target levels,” Neuberger Berman stated. “That said, the overall policy environment remains fairly stable, and we believe that market rates are unlikely to change significantly for a while.”

For perspective, the investment giant highlighted the recent decision by Australian and Canadian central banks to increase interest rates by 25 basis points in June. These were “surprise moves”, Neuberger Berman explained (as was the UK’s call to hike rates by 50 basis points), but not out of character for central banks that want to be sure the inflationary dragon is ‘tamed’ before relaxing their stance.

Hedging the risk

How it all unfolds will depend on the next few months, the money manager believes.

“Now the question is whether [the U.S. Federal Reserve] will continue to apply monetary brakes or see enough evidence of fading inflation to hold steady or even start to ease. Given recent hawkish surprises, we believe it’s possible that the central bank will follow through on an additional two rate hikes, as reflected its current 2023 dot plot.

“On the other hand, the lagging impacts of its aggressive measures, still evolving banking weakness and generally tighter financial conditions could tip the scales toward extending the existing pause amid a slowing economy,” the update continued.

“Indeed, we continue to believe that the fed funds rate is at or near its peak and that the Fed may not reach its current estimated terminal rate of 5.50 – 5.75 per cent. At a minimum, it has prepared the market for two-way risk, depending on how pricing and economic growth play out in the months ahead.”

Staff Writer