Central banks continue hiking, but at a slower pace

As expected, the US Federal Reserve raised its main policy rate by 50 basis points last Wednesday. The range is now between 4.25% and 4.50%, after having opted for 75 points at each of the four previous meetings. At the same time new interest rate projections by Fed members for 5.1% in 2023 took market by surprise. Chairman Powell said the central bank will make further rate hikes next year even if the economy slips into a possible recession, arguing that a higher cost would be paid if the institute did not keep inflation more firmly under control.

The Swiss National Bank has raised its base rate by 50 basis points to 1.00%. In order to reduce the inflationary pressure. Further rate hikes might be necessary in the medium term. SNB also assured they would be there to counter any weakening of the franc.

The European Central Bank decided to slow down the pace of its interest rate hike, 50 points compared to 75 at the last meeting and increased its rate to 2.5%, but stressed that the tightening of its policy should be extended.

Due to increasing energy prices, the French economy is expected to grow by a weak 0.3% next year, before a moderate rebound of 1.2% in 2024 and a more sustained 1.8% in 2025. For the central bank, activity would thus go through two distinct phases: a clear slowdown from this winter, followed by a decline in inflationary pressures and a gradual recovery in economic expansion in 2024 and especially in 2025. It now anticipates a rate of harmonized inflation of 6.0% on average per annum in both 2022 and 2023, with a peak in the first half of next year and a clear decline thereafter.

Switzerland's gross domestic product will grow by 2.0% in real terms this year and by only 0.7% in the coming year, according to the KOF Swiss Economic forecast. In 2024, growth is expected to be 2.1%. In October, the KOF was still expecting growth of 2.3% for this year. The estimates for 2023 and 2024 are unchanged.

On Tuesday The Bank of Japan kept its interest rate at -0.1% and the 10-year bond rate at around 0% by a unanimous vote. The board will widen the cap for 10-year government bonds from 0.25% to 0.5%. Its yield rose to 0.455%. The yen rose sharply, gaining nearly 3% to 133.15 per dollar. The Japanese currency rose 200 points to 0.6975 francs.

The Russian currency lost 5.5% to 68.00 per dollar, the lowest since 6 May. The rouble had reached 139 per dollar at the start of the war before strengthening to 53.50 at the end of June. The rouble is being hurt by low oil prices, which are reducing export earnings.

Yesterday oil price rose for a second day in a row caused by a weakening dollar, in a market still troubled by uncertainty. A barrel of WTI gained 50 cents to USD 76.35 and Brent gained 40 cents to USD 80.20.

As a result of the Bank of Japan's change of policy, yields on major government bonds rose. The yield on the Japanese 10-year bond remained unchanged at 0.40%. In contrast the German Bund gained 9 points to 2.29%, the British Gilts rose 9 points to 3.58% and the Swiss government bond rose 10 points to 1.36%. No exception for the US T-Bond which rose 13 points to 3.71%.