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\u2014quite a bit sooner than previously thought\u2014and finally ending its negative interest rate policy by March 2023. We\u2019ve also moved forward our forecast for the RBA to begin raising rates this year after it ended QE as expected in February.
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It\u2019s not surprising that rapidly shifting central bank rhetoric has led to some market volatility. The S&P 500\u2019s 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\u2019t helped risk appetite, and concerns about potential supply disruptions (combined with OPEC+\u2019s 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\u2014a 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.<\/p>\n