Rates rising everywhere! (Except in Turkey)

Financial markets have been paying close attention to central bank meetings since last Wednesday. Unsurprisingly, they have kept at their monetary policy squeeze to cope with unprecedented inflation. Rate hikes were again significant and came with comments about the need to continue to raise the cost of money in the coming months. The Fed was the first to make a statement, raising its interest rate by 0.75%, as expected, to between 3% and 3.25%. It warned that it would not stop there and that rates would reach at least 4.25% by the end of the year. This trend is expected to continue in 2023, but the rise will be less pronounced and economists now expect rate to peak in the vicinity of 4.50% to 4.60%. Chicago Fed President Charles Evans believes the US central bank will be able to pause for air after a further hike in March. US banks have warned that the financial health of their customers could deteriorate in the coming months. The effects of rising interest rates, inflation and the war in Ukraine will have a lasting impact on US consumers. The Americans are also worrying about employment again as the Fed’s latest decisions are expected to weigh on the labour market. The Fed now expects the unemployment rate, currently at 3.7%, to rise to 4.4% next year.

The Bank of England raised its key rate from 0.50% to 2.25% despite the economy’s entering recession. This expected increase was approved by five of the nine members of the Monetary Policy Committee, with three in favour of 75 basis points and one in favour of only 25 basis points. The announcement failed to boost the pound sterling, which is in free fall and approaching parity against the dollar and the franc. The decision by the government and Prime Minister Liz Truss on an unprecedented spending plan has raised fears of a slippage in the public finances and weighed heavily on the British currency, which hit its all-time low against the dollar at 1.0350 early Monday morning. The previous record had been set almost 40 years ago in the first quarter of 1985 at 1.0520.

The markets were also very eager to learn of Swiss National Bank’s decision on Thursday. There were few surprises, though, when it raised its key rate by 0.75% after a first increase in June of 0.50%. Interest rates in Switzerland are now positive again after just over 7 years and the SARON reference rate stood at 0.3750% this morning. The SARON is the new reference rate for derivative transactions and is used as the basis for calculating variable rate mortgages. In an initial reaction to this decision the franc fell and the euro briefly rose back above CHF 0.9700. Thomas Jordan said that the bank stood ready to return to the foreign exchange market, suggesting that the rise in the franc was reaching an uncomfortable level. The SNB tolerated the rise in the Swiss currency because it was a way to fight rising prices by containing imported inflation. But the President of the Central Bank cast doubt on the bank’s intentions when he clarified his thinking by saying that interventions could occur in both directions. Andrea Maechler touched on the subject again on Monday evening in an interview with German television channel SRF. “The rise in the franc has been a way of containing inflation, but if inflation were to become too pronounced then the SNB would be forced to intervene in the markets. It our currency were to instead weaken significantly, interventions would [also] be necessary”, she said. It is nevertheless clear that this second scenario is not in the cards at the moment.

The fourth major bank about to take a decision was the Bank of Japan. Unlike the other major central banks in the world, it has maintained its ultra-accommodative monetary policy. In doing so, it pushed the dollar above ¥145, a new 24-year high. To support its currency, the bank intervened in the foreign exchange market to the tune of ¥3,000 billion, or about $21 billion, bringing the parity down to 140.36. It was its first intervention since 1998. Japan, whose reserves total $1.17 trillion – the largest in foreign currency after China – can afford to continue its interventions, but the trend in the exchange rate cannot be reversed as long as the BOJ does not change its monetary policy and the Fed continues to raise its rates. With the USD/JPY back to 145.00, we should expect further intervention.

It is also worth noting that the Hungarian Central Bank raised its main policy rate again yesterday to 13%, the highest level since 2008. The Turkish Central Bank, on the other hand, is going against the grain and lowered its main rate by 1%, from 13% to 12%, an action that saw the Turkish lira plunge to its lowest ever level against the dollar. The bank justifies this decision by referring to uncertainties about global growth and geopolitical risks. President Erdogan says he values growth and exports over price stability.

WTI crude oil fell back below $80 a barrel on Friday, the first time it has fallen below $80 since January. Petrol demand continued to weaken in the United States, where inventories rose by 1.6 million barrels, three times more than the analysts’ consensus. Another falling asset is gold. The troy ounce stands at its lowest level since the beginning of April 2020 and has touched $1,620.25. The strength of the dollar and the scheduled rate hikes continue to weigh on prices.