Central banks raise rates again as the Fed leads the fight against global inflation

  • Rates increased from Britain to Indonesia after the Fed’s move
  • Investors are pricing in larger hikes from the ECB
  • Japan intervenes as the yen plummets
  • Emerging market currencies under pressure

FRANKFURT / WASHINGTON, Sept. 22 (Reuters) – Global central banks continued to raise interest rates on Thursday as the U.S. Federal Reserve struggled with inflation that is causing shockwaves in financial markets and the economy .

Japan, the outlier among major developed economies, kept interest rates stable on Thursday only to be punished when traders pushed the yen to an all-time low against the dollar, prompting the first intervention by Japanese authorities in support of the currency. since 1998.

It was a potential sign of a massive adjustment coming as the world adjusts to U.S. interest rates rising to levels not seen since the global financial crisis 15 years ago prompted the Fed to cut the benchmark rate to zero and unleashing massive rounds of bond purchases.

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That era of low-cost liquidity, which lasted during the worst of the coronavirus pandemic and until inflation became a major risk, is ending. US interest rates and the US dollar serve as benchmarks for borrowing costs around the world, and Federal Reserve officials have now signaled plans to not only continue tightening monetary policy, but to keep it tight for years. to come in what for many countries could amount to a new financial shock and extensive repricing of bonds, stocks and other financial instruments.

The dollar’s value is skyrocketing, helping to alleviate inflation in the United States even as it increases the costs of many dollar-priced imports to other countries, a factor that may have contributed to Japan’s intervention.

Some analysts believe others will follow.

“Intervening in the markets tends to lead to … less optimal economic results than they would otherwise be,” wrote RSM chief economist Joe Brusuelas after the Japanese action. “But the current inflationary shock could overcome this reluctance. We could enter an era of intervention in the currency markets.”

In the aftermath of the 2007-2009 financial crisis, central bankers often accused each other of waging currency wars to undermine local money and promote exports, an accusation punctually leveled at the Fed. Inflation it can now cause a similar strain in the other direction. US Treasury officials, who closely monitor global currency policies for signs that countries are taking action to gain an advantage, took note of Japan’s move on Thursday as an effort to “reduce the yen’s recently increased volatility.” , but they stopped before approving it. Read more

US Treasury Secretary Janet Yellen, who asked about the substantial depreciation of the yen in July, said that intervention on the currency was justified only in “rare and exceptional circumstances”. Read more

Although many countries are battling a common inflation epidemic in the aftermath of the COVID-19 pandemic, the Fed’s response has stood out for both the global role of the dollar and the aggressiveness of the US central bank.

Fed Chairman Jerome Powell, questioned about the risks to major central banks of shifting monetary policy in unison, said that while the Fed tries to estimate the impact of political “spillovers” between countries, he and his colleagues must stay focused on local economic conditions.

“We are very aware of what is happening in the other economies of the world and what it means for us and vice versa,” Powell said in his press conference Wednesday after the Fed approved its third consecutive “unusually large” rate hike of 75 points. base. But, he said, US officials “have internal mandates, internal goals” of stable US inflation and maximum employment.

HALF BOXES RATE EXCURSIONS

The Fed’s actions, along with those of other major central banks, provided the backdrop for early warnings from international officials and analysts that rising rates of currencies such as the dollar and euro could squeeze global financial conditions to to the point of leading to a recession.

Along with the Fed’s action on Wednesday, its fifth interest rate hike since March, half a dozen central banks from Indonesia to Norway have followed suit with their own rate hikes and often with guidance that would follow. more.

They are battling inflation rates ranging from 3.5% in Switzerland to nearly 10% in Britain, the result of a rebound in demand since the pandemic subsided, accompanied by weak supply, especially from China, and from rising prices of fuel and other commodities in the wake of the invasion of Ukraine.

Central bankers were adamant that curbing uncontrolled price growth was their main task at the moment. But they were preparing for their actions to take a toll, as rising financing costs typically dampen investment, hiring and consumption.

“We must leave inflation behind,” Powell reporters after Fed politicians unanimously said to raise the central bank’s benchmark overnight interest rate to a range of 3.00% -3.25% . “I wish there was a painless way to do it. There isn’t.”

The Fed said it expects an economic slowdown and an increase in unemployment to a level historically associated with a recession, a prospect that also looms wider in the euro zone and considered highly likely in Britain. Read more

The Bank of England raised rates and said it would continue to “respond strongly if necessary” to inflation, despite the economy entering recession.

“For borrowers, this will once again mean significantly higher costs and yet no real control over the soaring cost of living,” said Emma-Lou Montgomery, associate director of Fidelity International.

Global equities fell near a two-year low and emerging market currencies plummeted as investors braced themselves for a world where growth is poor and credit is harder to obtain.

Market participants have also pushed up their rate expectations for the European Central Bank, which is almost certain it will rise again on 18 October. 23. Now you see your interest rate rising to nearly 3% next year from 0.75% now.

Japan has decided to keep its rates close to zero to support the country’s fragile economic recovery, but many analysts believe its position is increasingly unsustainable given the global shift to higher financing costs.

“There is absolutely no change in our stance of maintaining an accommodative monetary policy for now. We will not raise interest rates for some time,” Bank of Japan Governor Haruhiko Kuroda said after the policy decision.

But the yen tumbled against the dollar following the decision, forcing the Japanese authorities to step in and buy the national currency in an attempt to stem the fall.

Meanwhile, on Thursday, the Turkish central bank continued its unorthodox policy by offering another surprise interest rate cut despite inflation exceeding 80%, bringing the lira to an all-time low against the dollar. Read more

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Recommendations by Francesco Canepa and Howard Schneider; Editing by Hugh Lawson and Andrea Ricci

Our Standards: Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

Covers the US Federal Reserve, monetary policy and economics, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economic reporter, and local Washington Post staff.

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