Latest interest rate predictions for the UK, US and Europe

We’ll get a much clearer picture about the cost of our mortgages and interest on our savings accounts when central bank’s change interest rates again this week. Here’s what’s expected to happen.

Half-point rate rises are not usually met with relief, but for investors over the next 24 hours that will be the overriding emotion as central banks soften their stance on inflation.

The US Federal Reserve will likely lead the way tonight in a move that snaps an unprecedented run of four consecutive 0.75% increases in interest rates, before policymakers at the Bank of England and European Central Bank (ECB) follow with their own 0.50% rises tomorrow.

Recent evidence of inflation’s peak is allowing policymakers to slacken the pace of tightening, but for businesses, mortgage holders and investors on both sides of the Atlantic, their rate rise worries are far from over.

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So-called dot-plot projections due to be released by the Federal Reserve are expected to show an eventual peak in rates above 5%, which compares with a range of 4.25%-4.5% assuming policymakers go for a 0.5% increase as Wall Street expects tonight.

A further increase of 0.25% is forecast in February, although yesterday’s inflation print of 7.1% means there’s less chance of policymakers going for another half-point rise.

The inflation figure for November was the lowest of 2022 so far and represented the fifth consecutive decline since inflation hit its peak of 9.1% in June. Core inflation still came in at 6%, but economists think the trend is downward as year-on-year comparisons ease.

The S&P 500 initially surged by 2.7% but hopes that this would mark the start of a festive bounce quickly ended due to caution ahead of today’s Federal Reserve projections. These are likely to point to a bumpier landing for the US economy than previously thought.

Analysts at Deutsche Bank noted that the Fed is poised to forecast an unemployment rate rising to 4.6% in 2023 and 2024, having been at 4.4% in the September projections.

Only rate-sensitive names from the technology sector held on to yesterday’s initial strong gains, aided by bond markets pricing in fewer rate hikes in 2023. Wall Street’s consensus is now for a terminal rate in May of 4.86% and for rates to finish next year at 4.38%.

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As we reported yesterday, market professionals surveyed by Deutsche Bank see a much greater chance of the UK becoming mired in a period of stagflation lasting up to three years.

Today’s UK consumer prices index (CPI) reading of 10.7% suggests that inflation has peaked, but resilient levels of economic activity and stronger wage growth mean the Bank of England’s 2% inflation target is a long way from being hit.

Policymakers are expected to increase rates from 3% to 3.5% tomorrow, and the chances of a back-to-back 0.75% hike have receded after this morning’s inflation figure came in below the 10.9% forecast by the Bank in November.

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Inflation fell in six of the 12 main categories of the CPI, reducing the chances that rates will need to reach 4.5% as many in the City had previously thought.

Paul Dales, chief UK economist at Capital Economics, said: “While inflation will fall from here, there is a lot of uncertainty about how fast it will fall and whether it will settle at or above the 2% target.

“We think it will still be around 4% by the end of next year. That’s why we think the Bank will err on the side of caution and raise interest rates further.”

The European Central Bank has increased rates by 0.75% on two occasions since July, but encouraging recent inflation data means it is in a position to slow the pace to 0.5%.

Bank of America expects an eventual peak for the deposit rate of 3.25% and for the ECB to make it clear tomorrow that policy needs to move into restrictive territory.