CENTRAL BANKS OPT FOR SMALLER RATE HIKES
The final month of 2022 reflected a change in the mood music on financial markets. With inflation coming off recent peaks, central banks generally followed through with less aggressive rate hikes in December. The Federal Reserve, European Central Bank and Bank of England each raised their key interest rates by 50 basis points (bps), a smaller rate hike than the 75bps announced at prior meetings. However, the Fed and ECB remained hawkish and flagged more rate hikes to come in 2023. A surprise came from the Bank of Japan, which unexpectedly raised the yield cap to 0.50% under its yield curve control policy.
Market reaction saw yields broadly rise in December, particularly in Europe, where additional 50bps hikes are expected in February and March. German two-year Bund yields rose to 2.73% from 2.12%, while 10-year yields increased 64bps to 2.57%. Short-dated market rates tracked higher, with the exception of the US where rates were generally steadier.