Global move on interest rates sends shudders through markets – The Irish Times

The Bank of England (BoE) kept its foot on the monetary brakes on Thursday, announcing another half-point rate hike, its seventh straight hike as it battles rising prices and falling consumer sentiment.

Despite suspicions that the UK economy is already in recession, the BoE’s nine-member monetary policy committee voted to hike interest rates by 0.5 percentage point to 2.25 percent – the highest level since 2008 – suggesting that the risk of inflation becoming entrenched now outweighs short-term threats to the economy.

The Swiss National Bank, the only central bank in Europe to have negative interest rates as of yesterday, also announced a 75 basis point rate hike to bring borrowing costs above zero for the first time in almost eight years. The hike brings Switzerland’s interest rate to 0.5 percent and represents the bank’s most aggressive tightening move in two decades.

Both announcements followed the Federal Reserve’s overnight move to raise interest rates by a further 0.75 percentage point to 3 percent, a level last seen in early 2008, while pledging that monetary tightening would not stop there . Policymakers in the US now expect the Fed’s interest rate to hit 4.4 percent by the end of the year – and continue to rise in 2023, significantly higher than forecast.

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The strength of interest rate hikes passed by central banks around the world sent shockwaves through financial markets amid fears that higher interest rates, which could ultimately lead to more expensive mortgages, credit and credit card debt for consumers, would trigger a larger global downturn could than previously forecast .

Most market indices posted their third straight day of declines on Thursday.

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The BoE estimates the UK economy will contract by 0.1 percent in the third quarter – partly due to the extra bank holiday for Queen Elizabeth’s funeral – which, combined with a fall in output in the second quarter, fits the definition of a technical recession.

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The changing state in which the UK economy finds itself was reflected in a rare tripartite split in the Bank of England’s nine-member Interest Rate Setting Committee. Five policymakers voted to raise interest rates by half a point, the same move as at the previous meeting; three wanted a more aggressive three-quarter point raise; and one person voted for just a quarter-point hike, arguing that economic activity is already slowing and future inflationary risks are fading.

Since the Bank’s last monetary policy meeting in August, major changes in government policy have altered the inflation outlook. A new government took over this month, led by Prime Minister Liz Truss. Amid concerns about the devastating impact of rising energy bills on homes and businesses, the government has decided to limit bills for both. The immediate implication is that UK inflation is expected to peak earlier and at a much lower rate.

The BoE said it expects annual inflation to peak at just below 11 percent next month. The freeze on household energy bills has lowered their forecast for peak inflation by about 5 percentage points.

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Meanwhile, outspoken European Central Bank (ECB) executive board member Isabel Schnabel said she expected euro-zone inflation to be higher than previously forecast, while defending the ECB’s plans to raise interest rates further. The ECB has hiked rates by a total of 125 basis points at its last two meetings to combat inflation that is nearing 10 percent across the euro area, and markets have further hikes at each ECB meeting until next spring priced in.

“There is reason to believe that inflation could rise even a bit further in the short term,” Ms Schnabel told a conference organized by Luxembourg-based finance firm Spuerkeess.

“Inflation may actually be more stubborn than we originally thought,” she said, adding that price growth has broadened and there is now a large proportion of goods with price growth above 3 percent. – Additional coverage from Reuters

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