The Central Banks of the US and the UK may raise interest rates by 75 basis points this week, with market expectations diverging.

This week, the monetary policy meetings of the Central Banks of the United States and the United Kingdom are highly anticipated. The market generally expects both central banks to announce an interest rate hike of 75 basis points, but the significance of this same rate hike differs greatly for the two countries.

For the Federal Reserve, four consecutive large interest rate hikes will put it in a critical decision-making position: whether to continue to curb high inflation or to prevent the economy from falling into recession. Currently, the market leans towards believing that the Federal Reserve may choose the latter and begin to slow down the pace of rate hikes.

For the Bank of England, a 75 basis point rate hike will be the largest in 33 years. In the context of high inflation and increasing risks of economic recession, the Bank of England seems more inclined to prioritize curbing inflation.

The Federal Reserve May Hint at Slowing Interest Rate Hikes

Last week, the U.S. Treasury market ended its 12-week losing streak. The yield on the 10-year U.S. Treasury bond fell to around 4%, reflecting an increase in investors' expectations that the Federal Reserve may slow the pace of interest rate hikes.

Some investors believe that the Federal Reserve's previous tightening policy may have negatively impacted the economy, and that it may slow the pace of interest rate hikes in the future. This view has been supported by some Federal Reserve officials.

However, the inflation pressure in the United States remains significant. The core PCE price index accelerated for two consecutive months in September, and consumer inflation expectations have also risen. This means that the Federal Reserve still faces challenges in curbing inflation.

The market generally expects the Federal Reserve to raise interest rates by 75 basis points in November, but there are differences regarding the rate hike in December. Some investors believe that the Federal Reserve will only slow down the pace of rate hikes if inflation data shows a significant decline.

At the same time, investors' expectations for the Federal Reserve to soon slow down interest rate hikes are warming up. The latest survey shows that investors have started to increase their holdings of long-term government bonds, with net long positions rising to a nearly two-year high.

The Bank of England Resists Inflation Pressure

Compared to the Federal Reserve, the situation for the Bank of England is more complicated. The UK's inflation rate reached 10% in September, a 40-year high. At the same time, the risk of economic recession in the UK is increasing and may persist until 2024.

Against the backdrop of significant interest rate hikes by the Federal Reserve and the European Central Bank, the Bank of England's rate hike appears relatively lagging. The market widely expects the Bank of England to announce a 75 basis point increase this week, which will be the largest single rate hike since 1989.

Former Prime Minister Truss's radical tax cut plan once triggered turmoil in the UK bond market. With the new Prime Minister taking office, the UK bond market has temporarily returned to calm, experiencing a significant rebound over the past two weeks. This has somewhat alleviated the pressure on the Bank of England to take drastic action.

However, the Bank of England still faces a difficult decision. Without understanding the details of the government's latest fiscal plan, the Central Bank needs to release its interest rate decision and economic forecast at this week's meeting. This undoubtedly adds to the complexity of the decision-making process.

Overall, although the Central Banks of the United States and the United Kingdom face similar expectations for interest rate hikes, there are significant differences in their policy considerations and market impacts. This week's monetary policy meeting will be an important window for observing the future policy direction of the two Central Banks.