US Fed to raise interest rates
Next week the FOMC, the US Federal Reserve’s monetary policy-making body, is due to meet. A rate hike of 0.25% seems almost certain. A sharp 0.5% rate hike has become highly unlikely, due to the outbreak of war in Ukraine. The FOMC should therefore meet market expectations and not trigger a market reaction. However, the reunion has potential beyond that. A new survey of meeting participants will be released. He will ask about expectations regarding the further development of the most important macroeconomic variables. This will show how the consequences of the war for the US economy, and therefore for the evolution of interest rates, are assessed. It will be difficult in this environment and therefore has the potential for a surprise.
Energy prices had already risen further since December, the date of the last survey, and have risen again since the outbreak of the war. Immediately, this means a sharper increase in already very high inflation, but also a burden on the economy. The average price of a gallon of fuel exceeded 4 USD in the United States, which was not the case in 2008, even though this price weighed more heavily on consumers then. This is because incomes were lower. But even now, this price of oil means risks for the economy. American workers have already had to accept real income losses since last fall due to high inflation. This development will now get worse for the time being.
At the same time, the labor market continues to perform very well. February data showed a strong increase in employment. The unemployment rate is stable at a low level. Wage growth has slowed, but there are often erratic moves here, so it’s too early to draw conclusions.
In addition to the forecasts of the participants in the meeting, the declaration of the FOMC and the press conference of the Fed Chairman Powell will be decisive for the markets. We expect the FOMC to take a cautious approach, given the uncertain environment. Interest rate decisions should be made on a meeting-by-meeting basis. The new buzzword in this context is probably “agile”, which has already been used a few times by Powell. A series of rate hikes is unlikely to be contradicted. In sum, however, the FOMC statements could cast doubt on the six rate hikes (0.25% each) currently expected by the market this year.
The FOMC meeting will also likely provide further insight into how the roll-off, the reduction in the central bank’s holdings of securities, is to play out. At the January meeting, Powell had announced that it would take more than one more meeting before a decision was made. We therefore anticipate the final announcement of the roll-off procedure at the May meeting and the implementation to begin in July.
EZ – Inflation forecast raised and GDP forecast lowered
Risks to inflation and the economic outlook have risen sharply due to the war in Ukraine and the wide-ranging economic sanctions it triggered. Following an initial assessment of the situation, we have significantly raised our inflation forecast for 2022 to 5.7% (previously 4.2%). In 2023, we expect a decline to 2.2% (previously 2.0%). As a result of the war, world prices for energy and food increased dramatically. We therefore expect this to have an equally significant impact on energy and food inflation in the euro zone from March. In addition, we expect war and sanctions to unfortunately increase supply chain issues again. Due to supply issues, we also expect stronger price increases for various consumer goods in the coming months.
Currently, we expect the diplomatic efforts of both warring parties to intensify in the coming weeks. This should contribute to a gradual easing of the situation on the energy and raw materials markets. In this context, we are expecting a slight decline in inflation rates in the second half.
Due to the significant rise in commodity prices and the expected intensification of supply chain issues, we have lowered our GDP forecast for 2022 to 3.8% (previously 4.4%). We expect the sharp rise in commodity prices to have a moderating effect on consumption. Industrial production is also expected to be negatively affected by rising commodity prices as well as supply chain issues. However, we do not currently expect the sanctions to lead to a complete disruption of Russian gas supplies to Europe.
On the other hand, the economy should benefit more than average from the recovery of the services sector following the end of restrictive measures in many European countries. In addition, we expect rising energy prices to drive investment in renewable energy and energy efficiency improvement measures. Furthermore, growth in southern Europe in particular will benefit significantly from the substantial funding provided under the EU’s 2022 reconstruction plan.
AT – War in Ukraine is holding back recovery and fueling inflation
The war in Ukraine and the resulting unprecedented political and economic sanctions against Russia will drive up prices and hamper economic recovery in Austria. Energy prices have recorded another significant increase since the outbreak of the war. Food prices are also expected to continue to rise, as the war is likely to lead to reduced production of certain foods, for example wheat and vegetable oils. In addition, there will be problems in the supply chains, which in turn will drive up the prices of producer and consumer goods. This will dampen private consumption, which was expected to be the main driver of the economic recovery this year. High prices for raw materials and energy, as well as problems in supply chains, will also have a negative impact on industrial production and thus slow down the development of investments. On the positive side, tourism and the services sector as a whole should benefit from the easing of restrictions related to COVID-19 and support economic growth.
In this context, we have revised down our Austrian GDP forecast for 2022 from +4.3% to +3.5%, while raising our inflation forecast from +3.9% to +5.5% . The situation remains characterized by high uncertainty, with economic risks on the downside. In our forecasts, we assume that there will be no further significant escalation of the conflict and that there will be no disruption of Russian gas supply.