US Fed likely to make final interest rate hike in May, and other economy stories you need to read this week

The US Federal Reserve will deliver a final 25-basis-point interest rate increase in May and then hold rates steady for the rest of 2023, according to a Reuters poll of economists. The poll also showed that a short and shallow US recession is likely this year.

Worries about an economic downturn, which the Fed also highlighted at its 21-22 March policy meeting, and concerns about banking sector stress have encouraged markets to price in at least a 25-basis-point cut by the end of 2023.

But a rate cut looks less likely than higher rates in the face of inflation that is running well over twice the Fed's 2% target, ongoing strength in the labour market and a significant easing in banking sector stress over the past few weeks.

US two-year Treasury yields, which typically reflect near-term interest rate expectations, have soared nearly 75 basis points in the past month as still-strong data have reduced the prospect of rate cuts.

"On the data front, despite the slowdown in inflation in March, there is still a lot more work to be done to get back to the 2% target," said Michael Gapen, chief US economist at BofA Securities.

China's economy grew at a faster-than-expected pace in the first quarter as the end of strict COVID curbs lifted businesses and consumers out of crippling pandemic disruptions, although headwinds from a global slowdown point to a bumpy ride ahead.

More than a year-long sweeping streak of global monetary policy tightening to rein in inflation has dented world economic growth, leaving many countries including China reliant on domestic demand to spur momentum and raising the challenge for policymakers looking for post-COVID stability.

China's GDP grew 4.5% year-on-year in January-March, data from the National Bureau of Statistics showed. This is up from 2.9% in the previous quarter. It also beat analyst forecasts for a 4.0% expansion and marked the strongest growth in a year.

A Chinese economic rebound is still seen as key to global growth this year as developed nations are hobbled by persistently high inflation, rising interest rates and sluggish expansion post-pandemic, and Russia’s invasion of Ukraine.

Britain is now the only large developed nation with double-digit inflation rates. Its annual consumer price inflation fell to 10.1% last month but defied forecasts for a bigger drop from February's 10.4% after a record rise in bread prices, the Office for National Statistics said.

The German government is set to slightly raise its economic growth forecast for this year to 0.4% from its previously predicted 0.2%, two sources told Reuters. For 2024, the government will slightly lower its prediction, to 1.6% from the 1.8% foreseen in January, the sources said.

The Bank of Japan's new chief Kazuo Ueda will not start unwinding its ultra-easy policy at the bank's 27-28 April meeting, nearly 90% of economists polled by Reuters said. The chance of a surprise tweak at Ueda's first rate-review appears to have subsided after he said changes won't happen quickly because of Western banking turmoil and fears of a global economic slowdown.

Argentina's central bank hiked the benchmark interest rate by a sharper-than-expected 300 basis points to 81% after inflation soared past expectations in March to hit 104% on an annual basis. March inflation data clocked in at 7.7%, the highest monthly level in two decades.

Australia's central bank is expected to get a new specialist board to manage monetary policy. It will give independent expert members more responsibility for setting interest rates, marking a dilution of the bank's traditional power over policy.

Russia's economic growth for 2023 is likely to come in at the top end of the central bank's forecast range of between minus 1% and 1%, deputy central bank governor Alexei Zabotkin said in an interview on state TV. Russia's economy shrank 2.1% in 2022 under the pressure of Western sanctions and fallout from its military campaign in Ukraine.

Governments and central banks need to embrace the need for deeper reform, rather than employing quick-fix monetary and fiscal measures any time a recession hits, Bank for International Settlements Chief Agustín Carstens has warned. These measures just stoke inflation or breed financial instability, The Financial Times reported him as saying.

While interest rates in advanced economies have begun to rise, rampant inflation has diminished potential profits, experts say. In its latest report, the IMF predicts that real interest rates in advanced economies will return to their pre-pandemic levels once inflation is tamed.

The recent collapse of Silicon Valley Bank stemmed from falling asset values as interest rates rose – this is known as interest rate risk. Central banks could come under pressure to reduce the chance of interest rate risk, which may in turn cause them to slow down rate rises – but this could mean even higher rates are needed in the longer term.

Interest rates have been rising globally because of record-breaking inflation – and it means changes to the way we spend and save money. Here's how it affects your life – the economy, your spending, your savings, housing costs and the cost of credit.