Earnings Call, Conference Presentation
Global Rates & FX Views: Central banks & budgets
Bank of AmericaSphia Salim, Zviya Salim, Aditya Bhave, Carlos Capistran, Izumi Davali, Ruben Segura-Guevara, Sonali Punhani
- The Federal Reserve faces a low probability (<15%) of a rate hike next week despite expectations for an immediate increase, with a potential miss likely triggering a shift to a quarterly hiking schedule (September, December, March) totaling 75 basis points rather than the current monthly pace.
- Failure to hike in October carries the risk of increasing upside inflation pressures as the Fed risks falling behind the curve, driven by an asymmetric reaction function where falling behind is feared more than overshooting.
- The Bank of Canada is expected to hold rates due to a weak economy with a negative output gap and contracting job market, despite headline inflation remaining above target, with the speaker predicting at most two hikes and viewing current market pricing of an 80% hike probability as excessive.
- The Bank of Japan is projected to hold rates at 1.25% while formally acknowledging 2% underlying inflation, validating a 25 basis point hike in December without a terminal rate commitment, though policymakers are expected to grow cautious as rates approach 2%.
- The ECB is anticipated to adopt a dovish stance focusing on growth consequences, framing the current cycle as a measured adjustment totaling 75 basis points, with a non-zero probability of skipping the December hike if activity data deteriorates significantly.
- The Bank of England is expected to maintain a hiking bias with future increases in November and February, though it will demand evidence of strong second-round effects before pricing more than four hikes, characterizing its approach as a "risk management insurance mode" for a small, gradual cycle.
- The UK government is preparing a cautious autumn budget designed to meet fiscal rules without carve-outs, requiring $8 billion in tax rises to restore post-measure headroom to $17 billion and addressing near-term energy inflation.
- UK fiscal headroom is projected to deteriorate to $10 billion pre-measure, with gross financing requirements for the current year potentially topped up by $10 billion via increased net T-bill sales, while major spending on defense and social care will be deferred to later years.