The End of Rate Hikes?

August 15, 2022 Jeffrey Kleintop
The signals from central banks that rate hikes, which began last year, may be coming to an end could be welcome news for investors looking ahead to the next 12 months.

The current rate-hike cycle began in earnest last year after record-breaking policy rate cuts among global central banks' responding to the economic impact of the 2020 global pandemic lockdowns. In early 2022, stocks around the world began to slide into a bear market as the net number of central banks hiking rates turned positive. The number of central banks hiking rates is now higher than the number that were hiking in 2008, when central banks attempted to rein in the massive liquidity fueling the global housing bubble. But now, signs are beginning to emerge that the trend in rate hikes may be nearing a peak which may be welcome news for investors.

Near a peak in rate hikes?

Line chart showing number of central banks out of 115 hiking rates less cutting rates, with shaded areas showing total central banks hiking rates and total central banks cutting rates.

Source: Charles Schwab, Macrobond data as of 8/10/2022.

Beginning of the end?

The Central Bank of Brazil (BCB) and the Czech National Bank (CNB) were the first major emerging market central banks to start tightening policy last year and lead the rush of other emerging market and developed market central banks to raise rates. They both now appear to be signaling that their respective rates have peaked.

  • In Brazil, the August 3 statement from the central bank stated that it will evaluate the need for a "residual hike of a smaller magnitude" after its 50-basis-point (bp) hike announced that day. The BNB is effectively signaling that hikes were likely over but that they were open to evaluating the need for one additional, smaller, and likely final, 25 bp hike at the September meeting.
  • In the Czech Republic, the central bank held rates steady on August 3 after a series of hikes totaling 675 bps and stated that "rates are at a level that is dampening domestic demand pressures." This suggests a view that any further rate hikes are unlikely to be effective in reining in inflation in the near term as growth is expected to weaken in the Czech Republic and around the world.  

Market sees a peak in early 2023

Following the signs of an end to rate hikes among those central banks that led the rate hikes, the market now expects the major central banks, such as the U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE), may end their rate hikes in the first half of next year.

Policy rates expected to peak in early 2023 among major developed market central banks

Line charts showing trajectory of reference rates from January 2021 through January 2024, with estimates from August 2022, for the European Central Bank, Federal Reserve  and Bank of England.

Source: Charles Schwab, Macrobond, CME Group, Federal Reserve, Bank of England, European Central Bank as of 8/10/2022.

Estimates shown in grey from August 2022 through January 2024. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.

The market expects the peak in rates to be followed by a gradual decline in policy rates beginning in the first half of 2023. But looking back, historically declines in policy rates haven't been gradual. In fact, over the past 20 years, the turn from hikes to cuts has tended to be abrupt, often in response to economic recessions. Rapid moves from hikes to cuts and back again was also the case during the inflationary-stubborn 1970s, for central banks when monetary policy was much different than today.

Monetary policy tended to transition quickly from hikes to cuts over the past 50 years

Line chart showing history of central bank reference rates from 1970 through 2024, estimates from mid-2022, for the Federal Reserve, European Central Bank and Bank of England.

Source: Charles Schwab, Macrobond, CME Group, Federal Reserve, Bank of England, European Central Bank as of 8/10/2022.

German Bundesbank discount rate used prior to Eurozone creation in 1998 as proxy for ECB policy rate.
Estimates shown in gray from August 2022 through January 2024. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.
 

Stocks and the end of rate hikes

An end to central bank rate hikes may help to turn around the losses seen this year in stock markets in major countries around the world.

  • In the U.S., history shows that after each of the last rate hikes by the Fed, the S&P 500 Index posted, on average, a gain of almost 15% over the next 12 months since 1970, with gains in eight of the 11 one-year periods following each peak in the federal funds rate.
  • In the United Kingdom, after each of the last BoE rate hikes, the MSCI United Kingdom Index rose on average 9.4% over the next 12 months, posting gains in seven of the 11 one-year periods following each peak in the bank rate.
  • In Europe, the ECB and its predecessor the German Bundesbank moved the policy rate relatively less often and less dramatically over the past 50 years. After each of the last rate hikes, the Europe STOXX 600 Index was flat (+0.1%) on average over the following 12 months, posting gains in only three of the seven periods. Historically, the central banks of Europe tended to take more gradual and longer paths for their rate hikes, with cycles often ending by an unrelated development such as the European Debt Crisis in 2011 or the U.S.-led Great Financial Crisis in 2008 and Dot-Com bubble bursting in 2000. This contributed to the weaker post-rate-hike performance. With the ECB adopting an approach to monetary policy similar to the U.S. and U.K. in recent years, the stock market outcome may become more favorable.  

Stocks on average have posted gains after the last rate hike

Bar chart showing average 12 month change for the S&P 500, the MSCI United Kingdom Index and the STOXX 600 after the peak in their respective central bank policy rates.

Source: Charles Schwab, Bloomberg data as of 8/11/2022.

Performance measured from day of last rate hike by the Federal Reserve, Bank of England, or ECB/Bundesbank, respectively. Indexes used: U.S. = S&P 500 Index, United Kingdom = MSCI United Kingdom Index, Europe = Europe STOXX 600 Index and the F.A.Z. Index of top German companies prior to the 12/31/1986 inception of the STOXX index. Past performance is no guarantee of future results.
 

Hindsight vs real time

Of course, it is easy to mark the timing of the last rate hike in hindsight. But that is much harder in real time. There is no guarantee that the market or central bank officials are right in expecting the last rate hikes to come in early 2023—they could come sooner or later depending on the inflation and economic data and due to unforeseeable developments that may change the environment entirely. But the signal that rate hikes have come to an end by the central banks that led the rush to hike rates may be welcome news for stock market investors looking out to the coming year.

 

Michelle Gibley, CFA®, Director of International Research, and Heather O'Leary, Senior Global Investment Research Analyst, contributed to this report.

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