Central Banks wage war on inflation; markets fall
Major global Central Banks this week doubled down on tighter monetary policies in an effort to control inflation, and as anticipated, greatly affected market movements.
On Wednesday, the US Federal Reserve raised its benchmark fund rate by 75 basis points, which was the largest hike in the US since 1994. On Thursday, The Bank of England raised its interest rates by 25 basis points to record its fifth consecutive rise in as many meetings. On the same day, the Swiss National Bank in what was perhaps a surprise move, raised its interest rates by 50 basis points. Following an emergency meeting on Wednesday, The European Central Bank announced that it plans to create a new tool to tackle the risk of euro-zone fragmentation, a move aimed at assuaging fears of a fresh debt crisis for the common currency bloc.
The main outlier Central Bank however was the bank of Japan, which stuck with its strategy of pinning 10-year yields near zero at its policy meeting in the previous week.
Global markets saw the worst weekly decline since the pandemic inflicted meltdown in March 2020 and as a result worries of a sharp economic slowdown.
US Federal Reserve
On Wednesday, the US Federal Reserve raised its benchmark fund rate by 75 basis points, which was the largest hike in the US since 1994. Before the announcement of May’s inflation rate, the Fed had been expected to announce a smaller increase. At a press conference, the Fed chair, Jerome Powell, said the central bank decided that a larger hike was needed after recent economic news, including last week’s announcement that inflation had risen to a 40-year high.
He made clear that a similarly outsized rate rise should be expected at its next meeting in July unless price rises softened.
The hike will increase the Fed’s benchmark federal-funds rate to a range between 1.5% and 1.75% and officials said they expected rates to rise to at least 3% this year.
ECB announces anti-fragmentation tool
The European Central Bank announced Wednesday that it plans to create a new tool to tackle the risk of euro-zone fragmentation, in a move designed to assuage fears of a fresh debt crisis.
The decision came after the central bank surprised market participants with an emergency meeting to address higher borrowing costs for many European governments.
After a regular policy meeting last week, the ECB suggested a more aggressive policy tightening but failed to deliver any new measures to support highly indebted nations in the bloc. This sparked some nervousness among money managers about financial fragmentation and led to an increase in bond yields. Italy’s 10-year bond yield crossed the 4% mark earlier this week — with one economist saying these levels “could eventually turn into a problem” for the south European nation.
Other central banks
The Bank of England raised its interest rates by 25 basis points to record its fifth consecutive rise in as many meetings. On the same day, the Swiss National Bank in what was perhaps a surprise move, raised its interest rates by 50 basis points.
The main outlier Central Bank however was the bank of Japan, which stuck with its strategy of pinning 10-year yields near zero at its policy meeting in the previous week.
The Hong Kong Monetary Authority automatically follows the Fed so it raised its base rate by 0.75% to 2%.
Market reaction
The S&P 500 is poised for its worst week since March 2020 after several key pieces of economic data fell short of forecasts this week, ranging from May retail sales to housing starts, compounding the Fed-induced recession fears.
European stocks inched higher on Friday but were set for sharp weekly losses as a slew of interest rate hikes from major central banks fuelled worries about a sharp economic slowdown.
The pan-European STOXX 600 index gained 0.1% by Friday morning but was on course to mark a 4.7% weekly decline in what could be its worst since early March. Shares in Asia-Pacific were mixed Thursday overnight, with Japan leading losses among the region’s major markets after The Bank of Japan decided to maintain its ultra-loose monetary policy stance, diverging substantially from its global peers.