The hawkish turn from major central banks that began late last year only accelerated in the early stages of 2022. Both the BoC and Fed used their January meetings to flag imminent rate increases and we look for hikes from both in March, slightly earlier than we previously assumed. The Fed sounded particularly hawkish, with Chair Powell not ruling out an accelerated pace of tightening relative to last cycle. Not to be outdone, the BoE and ECB surprised markets in early-February. The former raised rates as expected, but with several MPC members voting for a larger hike it looks like further tightening is on the way in March. The ECB sounded increasingly worried about inflation and looks set to announce an accelerated QE wind-down in March. We now see the central bank beginning to gradually raise rates later this year—quite a bit sooner than previously thought—and finally ending its negative interest rate policy by March 2023. We’ve also moved forward our forecast for the RBA to begin raising rates this year after it ended QE as expected in February.

It’s not surprising that rapidly shifting central bank rhetoric has led to some market volatility. The S&P 500’s 5.3% decline in January was the worst since March 2020 and the VIX volatility index hit a one-year high late in the month. Previously high-flying tech stocks have been hurt by rising rate expectations (putting a steeper discount on future earnings) with the NASDAQ falling 9% in January. Geopolitical tensions haven’t helped risk appetite, and concerns about potential supply disruptions (combined with OPEC+’s gradual approach to adding barrels) pushed WTI oil prices above US$90/bbl for the first time since 2014. Higher energy prices have been a key contributor to rising inflation—a dynamic central banks would normally look through but one that is difficult to ignore amid decades-high inflation rates and a number of other sources of price pressure.


  • Labour markets have largely or fully recovered in all of the economies we track and in some cases wage growth is accelerating. With inflation remaining stubbornly high (and generally stronger than expected) central banks are moving away from pandemic stimulus.
  • Bond yields have moved up sharply in anticipation of aggressive near-term tightening. For the most part, bringing forward some of the rise in yields we expected this year. We think further increases over the course of 2022 will be moderate.
  • We see both the Fed and BoC starting to raise rates in March and hiking 100 bps over the course of 2022. We could see back-to-back hikes early on but don’t think that will be sustained. Both central banks are likely to make QT announcements in the second quarter.
  • The BoE is starting its tightening cycle with a faster pace of rate hikes than we thought, though it hinted market expectations are too aggressive. We expect the pace of rate increases will slow after March as QT gets underway.
  • After a long period of subdued inflation, upside inflation surprises saw the ECB turn more hawkish and we expect will see stimulus dialed back in the coming months. The winding down QE is expected to be followed by gradual increases in the deposit rate toward zero by March 2023.


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Josh Nye is a senior economist at RBC. His focus is on macroeconomic outlook and monetary policy in Canada and the United States. His comments on economic data and policy developments provide valuable insights to clients and colleagues, and are often featured in the media.

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