The Central Banks of the US and UK may both raise interest rates by 75 basis points this week, but the implications are different.

Last week, the US and UK bond markets were active, with US bonds rebounding after a decline, ending a consecutive twelve-week downtrend, while UK bonds surged for two consecutive weeks.

Market expectations are that the Federal Reserve and the Bank of England will announce an interest rate hike of 75 basis points at their monetary policy meetings this week.

However, despite the same increase in interest rates, the significance for the two Central Banks is quite different:

For the Federal Reserve, four consecutive 75 basis point rate hikes will pose an important choice: the post-pandemic economic recovery is gradually being overshadowed by the negative effects of tightening policies, while inflation remains at a 40-year high. The Federal Reserve needs to weigh the trade-off between curbing inflation and avoiding an economic recession, and the market expects it is more likely to lean towards the latter.

For the Bank of England, a 75 basis point rate hike would be the largest increase in interest rates since 1989. The Bank of England is clearly placing more emphasis on fighting inflation rather than addressing economic recession. With the resignation of former Prime Minister Truss, the government bond market has temporarily calmed down, and the Bank of England will focus on tackling the most severe inflation problem in 40 years.

The Federal Reserve may slow down its pace after raising interest rates in November.

Recently, U.S. Treasury yields have fallen to around 4%, and some investors believe that considering the previous tightening policies that may lead to an economic recession, the Federal Reserve may slow down the pace of interest rate hikes in the future, potentially bringing an end to the decline in the bond market.

This view has received support from some Federal Reserve officials. San Francisco Fed President Daly stated that the Fed should avoid overly aggressive rate hikes that could lead the economy into a "self-induced recession," and that now is the time to discuss slowing down the pace of rate increases. Chicago Fed President Evans also warned that if next year's peak rate far exceeds the September expectation of 4.6%, the economy will face significant risks.

However, as concerns about recession spread, U.S. inflation remains high. Although the September PCE price index has slowed for three consecutive months, the core PCE price index has accelerated for two consecutive months. Additionally, the consumer confidence index rose to a six-month high in October, and inflation expectations have also increased.

Investors generally expect a 75 basis point rate hike in November, but there are differing opinions on the magnitude of the rate hike in December. Some institutions believe that the Federal Reserve may continue to raise rates significantly in December unless inflation data begins to decline noticeably.

At the same time, the market's expectations for the Federal Reserve to signal a slowdown in rate hikes are heating up, as reflected by the significant drop in the 10-year Treasury yield last week. Investors expect economic growth to slow considerably, and the Federal Reserve may begin to cut rates next year, prompting them to increase their holdings of long-term Treasury bonds.

The Bank of England may implement the largest interest rate hike in 33 years

The Bank of England's interest rate meeting this week faces a more complicated situation, as the fiscal plan originally scheduled for release on October 31 has been postponed by two weeks. This means that the Bank of England will make interest rate decisions and economic forecasts without knowing the details of the fiscal plan.

The market generally expects that the Bank of England may announce an interest rate hike of 75 basis points, which would be the largest single rate increase since 1989.

Compared to the Federal Reserve, the situation for the Bank of England is more challenging:

First, the UK is facing stubbornly high inflation. The inflation rate in September reached 10%, returning to a 40-year high. The Bank of England had previously warned that a larger-than-expected interest rate hike may be needed to alleviate the cost of living crisis. New Prime Minister Sunak also emphasized that addressing inflation is a current policy priority.

Secondly, the UK economy faces the risk of recession. The Bank of England expects the economy to fall into recession in the fourth quarter of this year, continuing until the end of 2023. Some analysts are even more pessimistic, believing that the recession may extend into 2024.

In this round of global interest rate hikes, the Bank of England was one of the first central banks to start raising interest rates, but the extent of the rate hikes has lagged behind the Federal Reserve and the European Central Bank. The Federal Reserve raised rates by 75 basis points three consecutive times, and the European Central Bank also raised rates by 75 basis points in one go last week, which has made the situation for the Bank of England even more awkward.

In addition, former Prime Minister Liz Truss's radical tax cut plan once plunged the UK bond market into crisis, and the UK government urgently needs to rebuild its credibility. With the new Prime Minister taking office, the UK bond market has temporarily regained stability, and over the past two weeks, the UK bond market has surged significantly.

Some economists believe that as political turmoil subsides, the risk premium for UK assets gradually diminishes, alleviating the pressure on the Bank of England to take aggressive action. However, in the face of persistently high inflation, the Bank of England still needs to remain vigilant and implement appropriate monetary policy measures.