2023 Global Macro Outlook: scenario update

A liquidity event in the US regional banking sector in recent days has been the catalyst for a dramatic re-pricing of the macro outlook and interest rates cycle.

Central banks are likely to be more cautious as they monitor the tightening in credit conditions. However, one major difference with previous banking crisis episodes is a more macro backdrop including persistent inflationary pressures. This will make for a difficult trade-off between inflation and financial stability risks, with central banks trying to resist rate cuts for as long as possible.

We expect the Fed to hike rates by 25bp next week, to 4.75%-5.0%, but stop afterwards. Fed chair Jerome Powell may stress again that monetary policy is working with a lag, and that recent events suggest that more tightening is spilling over to the real economy in order to justify a pause.
The Fed’s balance sheet runoff should continue at the current pace for now, although the path of least resistance would be for central banks to temporarily stop Quantitative Tightening (QT) in case of severe market dislocations.

This week, we expect the ECB to deliver the 50bp deposit rate rise it has already flagged, as well as an additional 50bp of tightening by June, to 3.50%.