“It is becoming increasingly likely that a contraction in economic output and a more significant rise in the unemployment rate is exactly what is needed to bring down inflation,” warned Tiffany Wilding, North America economist at US fund company Pimco, regarding the decision the fed
The central bank is also anticipating a recession in Great Britain. Added to this is the acute weakness of the pound against major currencies. Some economists are already warning of a balance of payments crisis.
The British central bank (BoE) has raised interest rates by 50 basis points to 2.25 percent. This is the highest level since 2008. The central bankers had already increased borrowing costs by half a percentage point at the beginning of August. However, financial markets had expected more and priced in a 75 basis point increase. At the same time, the central bankers announced that they would gradually reduce their bond portfolio of £857 billion from October.
Central bankers said they would “react vigorously” should inflationary pressures prove more intractable. The government’s energy aid could contribute to this, pumping an additional £150 billion (€172.5 billion) into the economy. The BoE still believes the country is slipping into recession and expects UK gross domestic product (GDP) to fall slightly in the third quarter of this year.
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With the pound falling to its lowest level against the dollar in almost 40 years and losing further ground after the interest rate decision, the British monetary authorities are under pressure to act to stabilize the currency’s external value. After Thursday’s decision, the pound fell below the $1.13 level. Year-to-date, it has lost over 16 percent against the US currency and around four percent against the euro.
UK inflation is 9.9 percent, five times the BoE’s target, and central bankers fear inflation will continue to rise towards 11 percent. The state price cap that the new government installed on October 1 is likely to have a dampening effect on the enormous price increases for electricity and gas. There will then be a price cap on electricity and gas so that the energy bill for an average household cannot exceed £2,500 (€2,875) a year over the next 24 months.
>> Read here: Bank of England hikes interest rates, but falls short of expectations
The government wants to cover the difference between the state-controlled prices and the actual market prices with new loans. The details of this will be announced by the new finance minister, Kwasi Kwarteng, in an emergency budget on Friday.
“Even if the imminent risk of a recession recedes next winter, significant fiscal stimulus increases the risk that high inflation will persist for longer – and with it the likelihood that the Bank of England will eventually have to adopt significantly tighter policy,” warns Sandra Horsfield, economist at financial services firm Investec.
The situation for British monetary politicians is particularly complicated because, in addition to the energy crisis and the general price surge, the effects of Brexit are also making themselves felt. Some experts, such as Deutsche Bank’s chief foreign exchange analyst, George Saravelos, are already warning of the danger of a balance of payments crisis. In the run-up to the meeting, he had argued that the central bank had to react clearly, otherwise the pound would depreciate sharply. In the first quarter, the UK deficit in the current account, i.e. in trade in goods and services, rose to a record 8.3 percent of economic output.
Swiss central bank
The situation in Switzerland is the opposite. The Swiss franc has appreciated there, which has alleviated the inflation problems. In Switzerland, the inflation rate in August was comparatively moderate at 3.5 percent, calculated as a year-on-year comparison. Nevertheless, the Swiss National Bank (SNB) raised the key interest rate by 0.75 percentage points to 0.5 percent on Thursday.
This is the largest increase in 20 years. She had been expected in advance. Central bank chief Thomas Jordan warned of second-round effects, i.e. price increases in response to previous cost increases. In its statement, the SNB declared its willingness to intervene in the foreign exchange market if necessary.
You will sell foreign exchange if the Swiss franc depreciates. She also wants to intervene if the Swiss franc appreciates, but only if it “appreciates excessively”. Jordan signaled further rate hikes but left open when such moves might follow and to what extent. The SNB raised its inflation forecast for this year from 2.8 to 3 percent. She expects 2.4 percent for next year and 1.7 percent for 2024.
>> Read here: fed raises key interest rate by 0.75 percentage points – “job market out of balance”
“If you look at our new conditional inflation forecast, you see that there is momentum towards the end of the forecast horizon that is pointing up,” Jordan said. “This clearly indicates that there is a likelihood that monetary policy will be tightened further.” Karsten Junius, economist at private bank Safra Sarasin, assumes that the SNB will hike interest rates again by half a percentage point in December.
Norway Bank
The Norwegian central bank is clearly further ahead with the rate hikes. It raised the key interest rate to 2.25 percent for the sixth time since September 2021. The currency watchdogs also justified this with the recent rapid increase in inflation, which was 6.5 percent in August.
However, the central bank sees clear signs of an economic slowdown, which will further dampen inflation. Faster rate hikes will now reduce the risk of inflation consolidating at high levels and the need for more tightening of monetary policy over the longer term. The bank announced that interest rates would likely be raised again in November.
Turkish Central Bank
Unlike many other players, the Turkish central bank surprisingly lowered the key interest rate by a full percentage point from 13 to 12 percent on Thursday. Most economists weren’t expecting it, as inflation in Turkey rose to over 80 percent in August. This is the highest level since 1998.
In a situation like the current one in Turkey, easing the interest rate reins contradicts conventional economic doctrine.
(Photo: AP)
The chief economist at the International Banking Federation (IIF), Robin Brooks, pointed out that the Turkish central bank unexpectedly lowered interest rates a year ago, triggering an uncontrolled devaluation spiral in the Turkish currency, the lira. “There is a risk that this will now be repeated,” he said.
If the central bank lowers interest rates, it becomes less attractive for international investors to invest money in Turkey. In view of the strong inflation, the real interest rate, i.e. the nominal interest rate less inflation, is very far in negative territory there. Since the beginning of the year, the Turkish lira has lost around 27 percent of its value against the dollar.
Bank of Japan
The central bank in Tokyo (BoJ) is sticking to its low interest rate policy. The interest rate for short-term government bonds (JGBs), which is largely controlled by the central bank, is still at minus 0.1 percent and that for ten-year JGBs at a maximum of 0.25 percent. Shortly after the rate decision, however, Japan’s Treasury launched FX intervention through the BoJ to support the yen. It was the first forex market intervention since 1998.
“Unilateral interventions are not very promising in the long run, the BoJ has already had to experience that painfully,” said Commerzbank analyst Esther Reichelt. “But they might be enough to buy the BoJ time if it considers a move away from ultra-expansive monetary policy in the near future.”
More: After the Fed scare – The really good buy rates are yet to come. A comment.