Aurelia Butler

Central banks in the United States, Canada, Australia, Switzerland and elsewhere have lined up with aggressive rate rises recently and the European Central Bank last month delivered its first rate hike since 2011.Japan, which is yet to lift rates in this cycle, is the holdout dove among the 10 big developed economies.In total, those central banks have so far raised rates in this cycle by a combined 1,315 basis points. Here’s a look at where policymakers stand in the race to contain inflation. G10 interest rates: https://graphics.reuters.com/BRITAIN-BOE/lbpgnanaevq/chart.png 1) UNITED STATES The Federal Reserve last week delivered its second straight 75 bps rate rise. Fed officials have reiterated their determination to get on top of red-hot inflation with tighter monetary policy.U.S. inflation rose to 9.1% in June, the highest level in more than 40 years. Markets price in a roughly 48% chance of a third 75 bps move in September. Even as growth worries mount, analysts say containing inflation will remain the Fed’s priority. U.S. inflation still at lofty levels: https://fingfx.thomsonreuters.com/gfx/mkt/jnpwedkgnpw/US2107PNG.PNG 2) CANADAThe Bank of Canada last month delivered the first 100-basis-point rate increase among the world’s advanced economies in the current policy-tightening cycle. It lifted its key policy rate to 1.5%.With annual inflation running at 8.1%, the highest in 39 years, analysts reckon another big rate hike is likely. Canada in the hawkish camp: https://fingfx.thomsonreuters.com/gfx/mkt/zdpxobjywvx/CA2107.PNG 3) NEW ZEALANDThe Reserve Bank of New Zealand delivered its sixth straight rate rise on July 13, lifting the official cash rate by 50 bps to 2.5%, a level not seen since March 2016.It remains comfortable with its planned aggressive tightening path to restrain runaway inflation. Reserve Bank of New Zealand gets aggressive: https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwzlddpo/Pasted%20image%201657727974842.png 4) BRITAINThe Bank of England on Thursday lifted its key rate by half percentage point to 1.75% – its highest level since late 2008.But the BoE warned that Britain was facing a recession with a peak-to-trough fall in output of 2.1%, similar to a slump in the 1990s but far less than the hit from COVID-19 and the downturn caused by the 2008-09 global financial crisis. BoE rate moves: https://graphics.reuters.com/BRITAIN-BOE/myvmnenzgpr/chart.png 5) NORWAY Norway, the first big developed economy to kick off a rate-hiking cycle last year, raised rates by 50 bps on June 23 to 1.25%, its largest single hike since 2002. The Norges Bank plans to raise rates by 25 bps at each of its four remaining policy meetings in 2022, although larger increments are also possible, Governor Ida Wolden Bache said. 6) AUSTRALIA The Reserve Bank of Australia on Tuesday raised rates by 50 bps, tightening policy for a fourth month running. But it tempered guidance on further hikes as it forecast faster inflation but also a slowdown in the economy.The RBA has now delivered 175 bps of hikes since May, taking its key rate to 1.85%, in the most drastic tightening since the early 1990s. G10 policy rates move: https://graphics.reuters.com/BRITAIN-BOE/gdpzyoyobvw/chart.png 7) SWEDENAnother late-comer to the inflation battle, Sweden’s Riksbank delivered a half percentage-point interest rate hike on June 30 to 0.75%, its biggest hike in more than 20 years.As recently as February, the Riksbank had forecast unchanged policy until 2024, but governor Stefan Ingves now expects rates to hit 2% in early 2023 and said 75 bps moves are possible. 8) EURO ZONE The European Central Bank last month hiked its deposit rate by 50 bps — more than expected — in its first rate rise since 2011 to fight soaring inflation. The move to raise rates to 0% ended an eight year experiment with negative rates.The bank is expected to hike rates again at its next meeting on Sept. 8. ECB monetary policy: https://graphics.reuters.com/EUROZONE-MARKETS/ECB/gkvlgyqjjpb/chart.png 9) SWITZERLANDOn June 16, the Swiss National Bank (SNB) unexpectedly raised its -0.75% interest rate, the world’s lowest, by 50 bps, sending the franc soaring.Recent franc weakness has contributed to driving Swiss inflation towards 14-year highs and SNB governor Thomas Jordan said he no longer saw the franc as highly valued. That has opened the door to more rate hikes. 10) JAPANJapan is the holdout dove. The Bank of Japan in July maintained ultra-low interest rates of -0.1% and signalled its resolve to keep them that way even as it projected inflation would exceed its target this year.BOJ Governor Haruhiko Kuroda said he had no plan to raise rates or hike an implicit 0.25% cap set for the bank’s 10-year bond yield target, because Japan was still recovering from the pandemic and its terms of trade had worsened. BOJ is the last dove standing: https://fingfx.thomsonreuters.com/gfx/mkt/klvykrzggvg/Pasted%20image%201655441669556.png More

LONDON (Reuters) -The Bank of England raised interest rates by the most in 27 years on Thursday, despite warning that a long recession is on its way, as it rushed to smother a rise in inflation which is now set to top 13%.Reeling from a surge in energy prices caused by Russia’s invasion of Ukraine, the BoE’s Monetary Policy Committee voted 8-1 for a half percentage point rise in Bank Rate to 1.75% – its highest level since late 2008 – from 1.25%.The 50-basis-point increase had been expected by most economists in a Reuters poll as central banks around the world scramble to contain the surge in prices.Governor Andrew Bailey said all options were on the table for the BoE’s next meeting in September, and beyond.”Returning inflation to the 2% target remains our absolute priority. There are no ifs and buts about that,” Bailey said at a news conference.MPC member Silvana Tenreyro voted for a 25-basis-point increase.The BoE warned that Britain was facing a recession with a peak-to-trough fall in output of 2.1%, similar to a slump in the 1990s but far less than the hit from COVID-19 and the downturn caused by the 2008-09 global financial crisis. The economy would begin to shrink in the final quarter of 2022 and contract throughout all of 2023, making it the longest recession since after the global financial crisis.Ushering in the slowdown, consumer price inflation was now likely to peak at 13.3% in October – the highest since 1980 – due mostly to the surge in energy prices following Russia’s invasion of Ukraine.That would leave households facing two consecutive years of declines in their disposable incomes, the biggest squeeze since these records began in 1964.Sterling fell against the U.S. dollar while futures priced in a further 25-basis-point rise in interest rates, to 2%, for the next BoE meeting in September.”Today’s decision confirms the notion of a central bank determined to crush inflation in the face of ongoing supply-side challenges, including a very tight labour market and soaring energy bills,” said Hussain Mehdi, macro and investment strategist at HSBC Asset Management.British consumer price inflation hit a 40-year high of 9.4% in June, already more than four times the BoE’s 2% target, triggering industrial action and putting pressure on whoever succeeds Boris Johnson as Britain’s next prime minister to come up with further support.The BoE had previously expected inflation to peak at above 11% and almost no growth in Britain’s economy before 2025 at the earliest.In its new forecasts, the BoE saw inflation falling back to 2% in two years’ time as the hit to the economy took its toll on demand.Bailey said the risks to the BoE’s outlook were “exceptionally large”.NO PRE-SET PATHThe British central bank has now raised rates six times since December but Thursday’s move was the biggest since 1995.The pressure on Bailey and his colleagues to move in larger steps intensified after recent big rate hikes by the U.S. Federal Reserve, the European Central Bank and other central banks. Those moves weakened the value of the pound, which can add to inflation.The BoE repeated that it was ready to move forcefully if needed to stem more persistent inflationary pressures.But it stressed that there were “extremely large” uncertainties about the economy – which could make the slowdown more or less severe than its core forecasts – and it would judge what its next moves should be as events unfold.”Policy is not on a pre-set path,” the BoE said. “The scale, pace and timing of any further changes in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures.”On top of everything else, the BoE’s inflation-fighting record has been called into question by Liz Truss, the front-runner to be Britain’s next prime minister. She wants to set “a clear direction of travel” for monetary policy and to review the BoE’s mandate. The BoE said it expected to start selling down its huge stockpile of government bonds, with active sales of around 10 billion pounds a quarter, shortly after its next meeting in mid-September.The gilt holdings peaked at 875 billion pounds in December and have since fallen to 844 billion pounds after the BoE stopped reinvesting the proceeds of maturing bonds in February. More

Reeling from a surge in energy prices caused by Russia’s invasion of Ukraine, the BoE’s Monetary Policy Committee voted 8-1 for a half percentage point rise in Bank Rate to 1.75% – its highest level since late 2008 – from 1.25%.MARKET REACTION:STOCKS: British stocks extended gains after the central bank decision and were up nearly 0.5% on the day. Banking stocks jumped briefly before consolidating gains.FOREX: The pound edged higher immediately after the rate decision but then turned lower on the day as the central bank said the economy will enter into a recession by the fourth quarter of 2022.MONEY MARKETS: Interest rate markets were pricing in about 32 bps of rate hikes by September compared to 34 bps before the rate decisionCOMMENTS: FRANCES HAQUE, SANTANDER UK CHIEF ECONOMIST:”With falling growth rates expected and inflation predicted to peak again in October with the next energy price cap, the outlook for the UK economy remains bleak. “The MPC have repeatedly stated that its purpose is to bring inflation back to target and will do what is necessary, in this case raising rates more quickly than previously. The question then remains how much further will the MPC need to go to ensure inflation expectations remain anchored in the medium term.”CHRIS BEAUCHAMP, CHIEF MARKET ANALYST, IG GROUP:”Having spent months trying to raise rates cautiously in order to avoid triggering a recession, it now expects one anyway, with further declines in real income. “Set against a U.S. economy that seems to be weathering rate hikes reasonably well, there seems little reason to chase the rally in sterling here.”SHANE O’NEILL, HEAD OF INTEREST RATES, VALIDUS RISK MANAGEMENT, LONDON:”Unsurprisingly, the market has latched onto the worsening forecasts more than the expected 50 bps hike and we have seen the pound fall more than 0.5% against the dollar and the euro immediately following the release. “The dreary predictions from the MPC represent ongoing pain for the consumer and focus will quickly turn to politicians to act. With Liz Truss the heavy favourite to take the Tory leadership, she may find the position a poisoned chalice as she takes the wheel just as we enter the worst recession in over a decade.” JANET MUI, HEAD OF MARKET ANALYSIS, BREWIN DOLPHIN: “The move is in line with the outsized rate increases other major central banks have done recently. Financial markets expect the bank rate to eventually peak at close to 3% sometime in 2023, so there is some way to go before the bank pauses.“With the forthcoming jumbo increases in energy bills and further tightening in financial conditions for some households and corporates, the cost of living crisis will be a burning policy issue for the contenders of the next prime minister.”SAM COOPER, VICE PRESIDENT, MARKET RISK SOLUTIONS, SILICON VALLEY BANK: “No surprise in the headline decision to hike the interest rate by a 0.50% increment. However, the bleak outlook for GDP and rising inflation forecasts included in the meeting minutes have dampened market confidence and this has translated into a weaker sterling.”STUART COLE, HEAD MACRO ECONOMIST, EQUITI CAPITAL:”What I think is very telling is that the forecast for inflation for end 2023 is higher than CPI is at the moment. It is hard not to see more 50bps hikes being delivered given that fact.”Add onto that the upwards revision to CPI, which is now seen peaking at 13.3% and remaining elevated throughout next year, and it all points to a tough policy dilemma for the BoE going forward.”PAUL CRAIG, PORTFOLIO MANAGER, QUILTER INVESTORS, LONDON:”In the back of the mind of policy makers will be the current public mood. Sentiment is shifting against the Bank of England with a recent survey pointing to more people being dissatisfied with the job it is doing than satisfied people. “The other significant shift from the BoE in recent weeks was the dropping of mortgage affordability rules. With the economic picture looking incredibly challenging, and mortgage rates subsequently rising off the back of the BoE’s moves, the decision to drop those rules is looking more and more circumspect by the day. There is a concern the lessons of 2008 are beginning to be forgotten.” More

Britain faces a protracted recession and the worst squeeze on living standards in more than 60 years, the Bank of England warned on Thursday, as it raised interest rates sharply and forecast inflation would hit 13 per cent by the end of the year.Eight of the Monetary Policy Committee’s nine members voted to raise interest rates by 0.5 percentage points to 1.75 per cent, the biggest increase in 27 years.This follows aggressive steps from the European Central Bank and US Federal Reserve in the face of soaring inflation. Silvana Tenreyro, an external member, voted against the majority for a smaller 0.25 percentage point rise.The BoE said that because of the latest surge in gas prices, it now expected inflation to rise above 13 per cent at the end of the year — much higher than its May forecast — and to remain at “very elevated levels” throughout 2023 before falling back to the 2 per cent target in two years’ time.The pound slipped as much as 0.4 per cent to $1.209 after the news, while the yield on 10-year UK government bonds fell 0.07 percentage points to 1.85 per cent.The BoE is under growing political pressure to tackle inflation after foreign secretary Liz Truss said she would look to change its mandate if she wins the Tory leadership contest and becomes UK prime minister.With wages rising at around half the rate of inflation, BoE forecasts showed that households’ post-tax income would fall in real terms in both 2022 and 2023, even after factoring in the fiscal support the government announced in May. The peak-to-trough decline of more than 5 per cent in household income would be the worst on record, with data stretching back to the 1960s.Even with households running down their savings, consumer spending was set to fall over the next year, said the BoE, dragging down economic growth. Its forecasts showed a much deeper contraction in gross domestic product than it forecast in May, with the economy entering recession in the fourth quarter of 2022 and continuing to shrink for five successive quarters.A peak-to-trough fall in GDP of 2.1 per cent would be comparable to that seen in the early 1990s and the BoE said that even once the economy came out of recession, it expected growth to be “very weak by historical standards”.The MPC said policy was “not on a preset path”, suggesting that the 50 basis point rate increase was not necessarily the first of many.The BoE’s central forecast, which is based on market expectations of interest rates rising to 3 per cent next year, showed inflation still at double digits in the third quarter of 2023, but falling back to the central bank’s 2 per cent target a year later. If the BoE took no further policy action, its forecasts show inflation would still fall below 2 per cent by the end of 2024.The BoE said the uncertainty around its central forecast — which assumes energy prices will follow market expectations for the next six months but then remain unchanged — was “exceptionally large” but that alternative scenarios it published still showed “very high near-term inflation, a fall in GDP over the next year and a marked decline in inflation thereafter”.Rishi Sunak, former chancellor, said the projected surge in inflation above 13 per cent reinforced his claim that his Tory leadership rival Truss would be reckless to increase borrowing and cut taxes now.“The Bank has acted today and it is imperative that any future government grips inflation, not exacerbates it,” he said. “Increasing borrowing will put upward pressure on interest rates, which will mean increased payments on people’s mortgages.”Sunak’s team said the 0.5 percentage point rise in interest rates would cost the Treasury more than £6bn in higher debt servicing costs.Truss has claimed that Sunak is partly responsible for pushing Britain towards recession, due to the series of tax rises he introduced as chancellor. More