The US and UK Central Banks are expected to raise interest rates by 75 basis points this week, but the implications are vastly different.

Last week, the US and UK bond markets showed a significant rebound. US bonds ended a twelve-week decline, while UK bonds rose for two consecutive weeks.

The market generally expects that the Federal Reserve and the Central Bank of the United Kingdom will raise interest rates by 75 basis points at their monetary policy meetings this week. However, the same magnitude of rate hike has completely different implications for the central banks of the two countries.

For the Federal Reserve, four consecutive rate hikes of 75 basis points will present a critical choice: the post-pandemic economic recovery is being overshadowed by the negative impacts of its tightening policies, while domestic inflation remains at a 40-year high. The Federal Reserve needs to make a choice between curbing inflation and avoiding an economic recession, with the market believing that the latter is more likely.

For the Bank of England, a 75 basis point rate hike would be the largest increase since 1989. The Bank of England clearly leans more towards combating inflation rather than responding to economic recession. After the new Prime Minister of the UK took office, the bond market temporarily regained calm, allowing the Central Bank to focus on addressing the most severe inflation problem in 40 years.

The Federal Reserve may slow down its pace after the interest rate hike in November

Recently, the yield on U.S. Treasuries has fallen to around 4%, and some investors believe that given the previous tightening policies that could lead to an economic recession, the Federal Reserve may slow down the pace of interest rate hikes in the future, and the decline in the bond market may soon come to an end.

This view has gained support from some Federal Reserve officials. San Francisco Fed President Daly stated that the Fed should avoid overly aggressive rate hikes leading to an "actively sluggish" economy, and that it is time to discuss slowing the pace of rate increases. Chicago Fed President Evans also warned that if the peak rate next year far exceeds the September expected 4.6%, the economy will face significant risks.

However, as recession fears spread, U.S. inflation remains high. The core PCE price index accelerated for two consecutive months in September, the consumer confidence index rose to a six-month high in October, and inflation expectations also increased.

The market has basically digested the expectation of a 75 basis point rate hike in November, but there are still differences regarding the extent of the rate hike in December. Some analysts believe that the Federal Reserve wants to break away from the monotonous 75 basis point pattern, but will only slow down the rate of increase when inflation data starts to decline.

At the same time, market expectations for the Federal Reserve to signal a slowdown in interest rate hikes have intensified, with the yield on 10-year Treasury bonds dropping significantly last week. Investors expect economic growth to slow markedly, and the Federal Reserve may start cutting interest rates next year, leading to an increase in holdings of long-term Treasury bonds. Recent surveys show that investors' net long positions in U.S. Treasuries have rebounded to recent highs.

The Bank of England may raise interest rates by the largest margin in 33 years.

The delay in the announcement of the UK fiscal plan has made this week's Bank of England interest rate meeting more complicated, as the central bank has to make rate decisions without understanding the details of the fiscal policy. The market generally expects the Bank of England to raise rates by 75 basis points, which would be the largest rate hike since 1989.

Compared to the Federal Reserve, the situation for the Bank of England is more precarious. First, the UK's inflation rate in September reached 10%, returning to a 40-year high. Secondly, the UK economy may have already entered a recession, which is expected to last until 2024.

In this round of global interest rate hikes, although the Bank of England started raising rates earlier, the scale has lagged behind the Federal Reserve and the European Central Bank. In addition, the former Prime Minister's aggressive tax cut plan has caused turmoil in the bond market, and the new government urgently needs to rebuild its credibility.

With the new Prime Minister taking office, the UK bond market has temporarily calmed down, having risen significantly for two consecutive weeks. Economists point out that as the political situation stabilizes, the risk premium on UK assets is gradually diminishing, and the pressure on the Bank of England to take aggressive action has eased.