Short-term Divergence in Monetary Policy Expected

The US economy is currently the best positioned of the major economies.   In contrast, Europe has the Ukraine-Russian war plus week demand in China.  Unlike other areas, European data on inflation is mixed puts the ECB in a tight spot next week on raising rates.

The UK is also facing a dilemna in terms of rate policy due to the nature of the mortgage market.  They are cognizant of the fact that more rate rises might place homeowners at risk due to mortgage resets from fixed to variable.  Mortgages in the UK are variable or fixed only for the short term, 3 to 5 years.  Thus, mortgage resits in a time of rising rates could cause defaults and damage to the consumer in the UK.   That is why Andrew Bailey, the BOE Governor, recently talked down the chance of further rate rises.

Rate Forecast

FED:  expect rate rises due to the better shape of the US economy.  For the FED to cut rates, unemployment needs to go to 4 to 4.5%.

ECB:  high uncertainty on rate rises for Europe next week.  One more rise is needed, will it be next week?  A stronger USD and higher oil prices put the risk that a rate rise might be required next week.  The data is not as conclusive as other areas and the USD and oil could tilt the policy makers to increase one more time next week.

BOE:  for the UK, caution is the word of the day due to risk from mortgage resets.  Policy-makers are concerned about over-doing it.  Thus, the UK policy is highly uncertain and either you disappoint the market by not raising resulting in a weaker currency (GBP) or you raise and increase the pressure on the consumer with higher costs for mortgage payments.