Central banks raise rates again as Fed fights global inflation

  • UK to Indonesia hiked rates after Fed leaves
  • Investors price in big hike from ECB
  • Japan stepped up as yen plummets
  • Emerging market currencies under pressure

FRANKFURT/WASHINGTON, Sep 22 (Reuters) – Global central banks continued to raise interest rates on Thursday, prompting the US Federal Reserve to battle inflation, which is sending shockwaves through financial markets and the economy.

Japan, among major developed economies, held interest rates steady on Thursday only to punish as traders pushed the yen to a record low against the dollar – the first by Japanese officials to support the currency since 1998. prompted to intervene.

It was a possible sign of a large-scale adjustment to come as the world was taking US interest rates to levels not seen since the global financial crisis, which prompted the Fed to cut its policy rate to zero. And led to freebies having a big round of bondbuying.

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The era of cheap liquidity, which passed through the worst of the coronavirus pandemic and until inflation became a major risk, is now coming to an end. US interest rates and the US dollar serve as reference points for borrowing costs around the world, and Federal Reserve officials have now flagged plans to not only continue tightening monetary policy, but Over the years many countries have asked to keep it tight for the amount. For a new financial shock – and a comprehensive revaluation of bonds, stocks and other financial instruments.

The dollar’s value continues to rise, helping to moderate inflation in the United States, even as it increases the cost of imports to other countries worth several dollars, a factor that has contributed to Japan’s growth. may be involved in interference.

Some analysts believe that more is bound to happen.

RSM chief economist Joe Brusuelas wrote after Japan’s action, “Intervening in markets results in … a less optimal economic outcome than would otherwise result.” “But the current inflation shock may outweigh this reluctance. We may be entering an era of intervention in the forex markets.”

After the financial crisis of 2007 to 2009, central bankers often accused each other of waging currency wars to cheapen local money to boost exports, with the Fed explicitly accused. Inflation could now create similar tensions in the other direction as well. US Treasury officials, which monitor global currency policies, signal countries are intervening to gain an advantage, on Thursday the yen as an effort to “mitigate recently increased volatility”. Noticed Japan’s move, but stopped short of supporting it. read more

US Treasury Secretary Janet Yellen, asked in July about the yen’s substantial depreciation, said currency intervention was necessary only in “rare and exceptional circumstances”. read more

While many countries are grappling with the wrath of a general inflation following the COVID-19 pandemic, the Fed’s response has come under fire from both the global role of the dollar and the aggression of the US central bank.

Fed Chairman Jerome Powell, asked about the risks of major central banks shifting monetary policy together, said that when the Fed tries to gauge the impact of policy “spillovers” between countries, he and his colleagues has to focus on local economic conditions.

“We are very aware of what is happening in other economies around the world and what this means for us and vice versa,” Powell said in his press conference on Wednesday. , But, he said, US officials have a “domestic mandate, a domestic objective” of stable US inflation and maximum employment.

Half a dozen rate hikes

Actions by the Fed along with other major central banks come against the backdrop of early warnings from international officials and analysts that rising rates of currencies such as the dollar and euro could tighten global financial conditions so much that it triggers a global recession.

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

They are fighting an inflation rate in the UK ranging from 3.5% in Switzerland to nearly 10% – the result of a rebound in demand as the pandemic subsided with sluggish supplies, especially from China, and rising supplies of fuel and other commodities. In view of prices. invasion of Ukraine.

The central bankers were adamant that their main task at present is to contain the price rise. But they were prepared to take a toll for their actions, as rising borrowing costs typically curtail investment, hiring and consumption.

“We have to get inflation behind us,” Powell told reporters after Fed policymakers unanimously agreed 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 this. There isn’t.”

The Fed said it expects the economy to slow significantly and unemployment to rise to a degree historically associated with recessions – a possibility becoming even bigger in the euro area and seen as highly likely in the UK. Is. read more

The Bank of England raised rates and said that even as the economy entered recession, it would continue to “coercively, necessarily respond” to inflation.

“For borrowers, this would again mean significantly higher costs and still no real control over rising cost of living,” said Emma-Lou Montgomery, an associate director at Fidelity International.

World stocks fell to near two-year lows and emerging market currencies fell as investors prepared for a world where growth is scarce and credit is hard to get.

Market participants have also raised their rate expectations for the European Central Bank, which is set to rise again on 23 October. Now it is taking its interest rate to around 3% from 0.75% next year.

Japan opted to keep its rates near zero to support the country’s fragile economic recovery, but many analysts see its position becoming increasingly volatile given the global shift to higher borrowing costs. can.

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

But the yen fell against the dollar after the decision, forcing Japanese officials to step in and buy the domestic currency to prevent the slide.

Meanwhile, Turkey’s central bank made another surprise interest rate cut on Thursday with its unconventional policy while inflation was running above 80%, sending the lira to an all-time low against the dollar. read more

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

Our Standards: Thomson Reuters Trust Principals.

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