The central banks of the US and the UK may raise interest rates by 75 basis points this week, with different implications.

This week, the Central Banks of the United States and the United Kingdom will hold interest rate meetings, and the market widely expects both countries' Central Banks to announce a rate hike of 75 basis points. However, the significance of this same rate hike for the two Central Banks is quite different.

For the Federal Reserve, this will be the fourth consecutive interest rate hike of 75 basis points, placing it at a critical decision point. The momentum of the post-pandemic economic recovery is being offset by the negative effects of tightening policies, while domestic inflation remains at its highest level in 40 years. The Federal Reserve needs to weigh the trade-off between curbing inflation and avoiding a recession, with the market expecting it to lean more towards the latter.

In contrast, a 75 basis point rate hike would be the largest increase in interest rates for the Bank of England since 1989. In the face of a severe economic situation, the Bank of England seems more inclined to prioritize addressing inflation issues. After the resignation of former Prime Minister Truss, the bond market temporarily regained calm, creating conditions for the Central Bank to focus on tackling the most serious inflation in 40 years.

The Federal Reserve May Slow Down Rate Hikes

Last week, the U.S. Treasury market rebounded, with the 10-year Treasury yield falling to around 4%. Some investors believe that the Federal Reserve's previous tightening policies may lead to an economic recession, and therefore, it may slow down interest rate hikes in the future, potentially ending the downward trend in the bond market.

This view has received support from some Federal Reserve officials. Some dovish officials have stated that overly aggressive interest rate hikes should be avoided to prevent the economy from falling into a "deliberate recession," and they believe it is time to start discussing slowing the pace of rate increases.

However, inflationary pressures in the United States remain significant. Although the overall PCE price index has slowed for three consecutive months in September, the core PCE price index has accelerated for two consecutive months. The consumer confidence index has also risen to a six-month high, and inflation expectations have increased.

Market expectations for a 75 basis point rate hike in November have basically taken shape, but there are still differences regarding the extent of the rate hike in December. Some analysts believe that the Federal Reserve may only consider slowing the pace of rate hikes after seeing a significant decrease in inflation data.

At the same time, the market's expectations for the Federal Reserve to soon signal a slowdown in interest rate hikes are heating up. Investors anticipate that economic growth will significantly slow down, and the Federal Reserve may begin to cut interest rates next year. As a result, holdings of long-term government bonds are increasing, and multiple surveys indicate that investors' net long positions in government bonds have rebounded to recent highs.

The Bank of England May Significantly Raise Interest Rates to Address Inflation

The Bank of England's interest rate meeting this week faces a more complicated situation. Due to the postponement of the new government's fiscal plans, the central bank will make interest rate decisions and economic forecasts in the absence of fiscal details.

The market generally expects the Bank of England to raise interest rates by 75 basis points, which would be the largest increase since 1989. Compared to the Federal Reserve, the situation for the Bank of England is more challenging:

First of all, the inflation issue remains severe. In September, the UK's inflation rate reached 10%, returning to a 40-year high. The Central Bank had previously warned that it may need to raise interest rates more than expected to alleviate the pressure from rising living costs.

Secondly, an economic recession is imminent. The Bank of England predicts that the economy will enter a recession in the fourth quarter of this year and continue until the end of 2023. Some analysts even believe that the recession may extend into 2024.

In addition, although the Bank of England started this round of interest rate hikes earlier, the pace of its rate increases has lagged behind that of the Federal Reserve and the European Central Bank, which puts it under greater pressure.

With the new Prime Minister taking office, the UK bond market has temporarily returned to calm, with government bond prices rising sharply for two consecutive weeks. This creates conditions for the Central Bank of the UK to take more aggressive action, helping to restore the credibility that had been damaged earlier.