Central Banks Stepping Down

Markets seem to have been taking their direction from central banks for most of 2022. While a pivot to rate cuts does not seem likely in the near term, if central banks signal a step down in the size of the rate hikes or a pause, stocks may breathe a sigh of relief.

In the past week, there have been some signs of stepping down by major central banks:

  • The U.S. Federal Reserve appeared to signal an intention to slow the pace of rate hikes from 75 basis points (bps) to 50 bps in December, while noting that the ending point for rates may be higher than markets had been expecting. 
  • Norway's central bank hiked its policy rate by 25 bps, below market expectations of 50 bps, and slower than the hiking pace of 50 bps from the prior meeting. 
  • The Reserve Bank of Australia had already hiked by 50 bps for four straight meetings but surprised with a slower pace of 25 bps in October and again last week.  
  • The Bank of England voted 7-2 to lift rates by 75 bps to 3%, the highest level in 14 years. But in contrast to the Fed, they issued an unusually blunt comment on investors' outlook for future hikes, stressing the peak in rates will be "lower than [what is] priced into financial markets." 

Last week's announcements continue the emerging trend seen in recent weeks that suggests a nearing end to the rate hiking cycle. Other major central banks have also pulled back from aggressive rate hikes in October and some have even halted their hikes. The chart below shows the pace of rate hikes for major central banks—notice that the bars are getting smaller as rate hikes are moderating. The shaded column for December reflects current market-based forecasts.

Rate hikes have started to be smaller in size

Chart showing rate hike activity in 2022 for the central banks of Brazil, Poland, Norway, Australia, Canada, European Union, United Kingdom and the United States.

Blank columns reflect months without scheduled central bank rate setting meetings. 

*Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data. 

Source: Charles Schwab, Bloomberg, as of 11/4/2022.

The step down began to emerge in October:

  • The Bank of Canada surprised by hiking at a smaller rate of 50 bps rather than the expected 75 bps. 
  • The European Central Bank hiked by 75 bps for the second straight meeting. However, its remarks sounded more cautious about the economy and eliminated the word "several" from the number of hikes remaining. There were also reports that three voters wanted a smaller hike at the October meeting. The ECB said it has more work to do on inflation and future hikes are both data-dependent and would be considered meeting by meeting. The outcome was to lower market expectations for the peak rate in the Eurozone next year by 50 bps.
  • The central bank of one of the largest emerging market economies, Brazil, and the central bank for the largest emerging market economy in Europe, Poland, both left rates unchanged.

Stepping down from aggressive rate hikes could help boost stock markets. Since signs of a stepping down began to emerge at the start of October, the MSCI EAFE Index of international stocks climbed nearly 10%. Stock markets outside the U.S. that are outperforming the S&P 500 Index this year include many countries where the central banks are stepping down, as you can see in the table below. 

Stepping down outperformance

Table illustrating year to date performance in US dollars of Brazil's IBOVESPA at 24%, Norway's OBX at -10.3%, Canada’s S&P/TSX at -14.1%, the UK's FTSE 100 at -16.5%, Australia's S&P/ASX 200 at -17.4% and the U.S.'s S&P 500 at -20.1% as of 11/4/2022.

Performance reflects total return measured in US Dollars for all indexes.

Source: Charles Schwab, Bloomberg data as of 11/4/2022. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is no guarantee of future results.

There can be no guarantee that central banks will continue to step down the pace of their hikes or pause them, but if they do it is possible a "Santa Pause" rally could be in store for markets as the year draws to a close.

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


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