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

Last week, the US and UK bond markets showed a strong rebound, with US Treasuries ending a 12-week decline, while UK bonds surged for the second consecutive week. The market widely expects that the Federal Reserve and the Central Bank of the UK will announce a 75 basis point interest rate hike at this week's monetary policy meetings.

However, the same rate hike has completely different implications for the central banks of the two countries:

For the Federal Reserve, a consecutive fourth rate hike of 75 basis points will present a critical choice: the post-pandemic economic recovery momentum is being overshadowed by the negative effects of its tightening policy, while domestic inflation remains at its highest level in 40 years. The Federal Reserve needs to make a trade-off between curbing inflation and avoiding an economic recession, with the market expecting it to lean more towards the latter.

In contrast, for the Bank of England, a 75 basis point rate hike means that the bank will raise borrowing costs by the largest margin since 1989. The Bank of England clearly leans more towards controlling inflation rather than economic recession. As the political situation stabilizes, the Bank of England may focus on addressing the most serious inflation problem in 40 years.

The Federal Reserve May Slow Down Rate Hikes

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

This view has received support from some Federal Reserve officials. Some of the more dovish officials stated that the Federal Reserve should avoid causing the economy to fall into a "self-induced recession" due to overly aggressive interest rate hikes, and that it is time to start discussing slowing down the pace of rate increases.

However, despite the increasing concerns of recession, inflation in the United States remains high. The core PCE price index accelerated for two consecutive months in September, and consumer inflation expectations also rose in October.

Investors generally expect a 75 basis point rate hike in November, but there is disagreement on the magnitude of the increase in December. Market expectations are rising that the Federal Reserve will signal a slowdown in the pace of rate hikes, as reflected by the significant decline in the 10-year Treasury yield last week.

The Bank of England Faces Greater Challenges

Compared to the Federal Reserve, the situation of the Bank of England is more complicated. Firstly, the inflation rate in the UK has reached 10%, returning to a 40-year high. Secondly, the risk of economic recession in the UK is imminent, with analysts predicting that the recession may last until 2024.

In this round of interest rate hikes, although the Bank of England was one of the first central banks to start raising rates, the magnitude of the increases has lagged behind that of the Federal Reserve and the European Central Bank. This has made the situation for the Bank of England even more awkward.

As the political situation stabilizes, the UK bond market has gained a brief respite. In the future, the Bank of England may focus more on addressing inflation challenges, while the government also needs to rebuild its credibility.

This interest rate hike decision is crucial for both Central Banks, as they seek to balance controlling inflation and maintaining economic growth. The market will closely monitor the decisions of both Central Banks and their impact on the global financial markets.