Take Two: Fed and Bank of England raise rates to 2008 highs, Japan intervenes in currency market

What do you need to know?

The US Federal Reserve and Bank of England raised interest rates to their highest levels since the 2008 financial crisis as they sought to tackle inflation. The Fed’s third consecutive 75-basis-point (bp) hike took rates to 3%-3.25% and markets fell on the news. The so-called ‘dot plot’ chart of officials’ rate expectations signalled more to come, with a median forecast of 4.4% by the end of 2022, compared to June’s forecast of 3.4%, and reaching 4.6% next year. The Fed’s 2022 GDP forecast was cut to 0.2% from 1.7% in June. The Bank of England raised rates by 50bp to 2.25%, its seventh consecutive increase. It expects the economy to contract by 0.1% in the third quarter (Q3), which would put the UK into a technical recession.

Around the world

Japan intervened in currency markets for the first time since 1998, buying yen to help arrest a sharp decline – earlier this month the yen fell to a 24-year low against the US dollar. Vice Finance Minister for International Affairs Masato Kanda called the move “decisive action” – the yen rose around 2% against the dollar as reports filtered into markets. The decision came after the Bank of Japan bucked the trend among central banks and stuck with ultra-low interest rates at -0.1%. It also confirmed its pledge to leave rates at “present or lower levels”.

Figure in Focus: $93

Oil prices were volatile during the week, buffeted by contrasting news flow. Brent crude moved as high as $93 on Wednesday as Russia announced a planned partial mobilisation that would potentially add 300,000 more soldiers on the ground in Ukraine. That momentum was supported by anticipation of rising Chinese demand for crude oil, with freight rates to China of crude from the US and Middle East reaching a two-year high. The Fed’s rate hike, however, helped to moderate gains, with fears about US gasoline demand pushing the price back close to $89. Brent was trading at around $90 on Friday morning, little changed over the week.

Words of Wisdom:

Digital Euro: The prospect of an electronic form of the euro, initiated by the European Central Bank (ECB) and various other national central banks to help digitalise the European economy. The digital euro would be designed to be a risk-free and stable form of payment with the aim of improving accessibility. The initiative is still in the early stages, testing the potential impact it might have on legislation and the financial sector. The ECB has selected five companies to take part in a prototyping exercise which will determine the eventual user interfaces. The results of that exercise will be published in early 2023.

What’s coming up?

Germany releases its September Ifo business climate index on Monday, while a series of US home sales and prices data are announced on Tuesday. On Wednesday, the Bank of Japan publishes the minutes from its latest monetary policy meeting. A final reading for Q2 US GDP growth is released on Thursday, as are several Eurozone measures, including the latest consumer confidence, industrial and economic sentiment indices. On Friday updated Eurozone inflation and unemployment numbers are reported, while the Reserve Bank of India meets to decide on interest rates.