By Francesco Canepa and Howard Schneider
FRANKFURT/WASHINGTON (Reuters) – Global central banks continued to raise interest rates on Thursday in the wake of the US Federal Reserve’s fight against inflation that sent shock waves through financial markets and the economy.
Outside of major advanced economies, Japan kept interest rates steady on Thursday only to be penalized as traders pushed the yen to a record low against the dollar – prompting the Japanese authorities’ first intervention to prop up the currency since 1998.
It was a potential sign of a massive adjustment as the world adjusts to US interest rates rising to levels not seen since the global financial crisis 15 years ago, prompting the Federal Reserve to cut its policy rate to zero and unleashing massive rounds of bond buying.
That era of cheap cash, which lasted during the worst of the coronavirus pandemic and until inflation became a prominent risk, is now over. US interest rates and the US dollar serve as reference points for borrowing costs around the world, and Federal Reserve officials have now indicated plans not only to continue tightening monetary policy, but to keep it tight for years to come in what could reach many countries. to a new financial shock – and massive repricing of bonds, stocks and other financial instruments.
The dollar is rising, helping to dampen inflation in the United States even as it raises the costs of many other countries’ dollar-priced imports, a factor that may be a factor in Japan’s intervention.
Some analysts say more needs to be done.
RSM Chief Economist Joe Brosolas wrote after Japan’s move: “Intervention in the markets tends to … less ideal economic outcomes than it will produce.” “But the current inflation shock may outweigh this reluctance. We may enter an era of intervention in the foreign exchange markets,” he added.
In the aftermath of the 2007-2009 financial crisis, central bankers often accused each other of waging currency wars to drive down domestic money to boost exports, an accusation clearly directed at the Federal Reserve. Inflation may now push a similar tension in the other direction. US Treasury officials, who are closely monitoring global currency policies for signs that countries are stepping in for an advantage, noted Japan’s move Thursday as an attempt to “reduce the recently increased volatility” in the yen, but it stopped short of endorsing it.
Asked in July about the significant depreciation of the yen, US Treasury Secretary Janet Yellen said currency intervention was only justified in “rare and exceptional circumstances”.
Although many countries are commonly battling outbreaks of inflation in the wake of the COVID-19 pandemic, the Fed’s response has been notable due to the global role of the dollar and the aggressiveness of the US central bank.
Asked about the risks of major central banks changing monetary policy in unison, Fed Chair Jerome Powell said that while the Fed was trying to estimate the impact of policy “ramifications” between countries, he and his colleagues had to stay focused on domestic economic conditions.
“We are well aware of what is happening in other economies around the world and what that means for us and vice versa,” Powell said at his press conference on Wednesday after the Fed approved its third “unusually large” interest rate hike of 75 basis points. . But he said US officials “have a local mandate and local goals” for stable inflation in the United States and maximum number of jobs.
Half dozen picnic
The Fed’s actions, along with those of other major central banks, set the backdrop for early warnings from international officials and analysts that rising currencies such as the dollar and the euro could tighten global financial conditions so much that they lead to a global turnaround. Recession.
Along with the Fed’s action on Wednesday, the fifth rate hike since March, six central banks from Indonesia to Norway followed suit with their own rate increases and often with other directives to follow.
They are battling inflation rates ranging from 3.5% in Switzerland to nearly 10% in Britain – the result of a rebound in demand since the pandemic subsided accompanied by slowing supply, especially from China, and higher prices for fuel and other goods in the wake of Russia. Invasion of Ukraine.
Central bankers were adamant that curbing unbridled price growth was their main task for the time being. But they were preparing to have a negative impact on their actions, as rising borrowing costs erode investment, employment and consumption.
“We have to put inflation behind us,” Powell told reporters after Fed policymakers unanimously agreed to raise the central bank’s key interest rate to the 3.00%-3.25% range. “I wish there was a painless way to do it. There isn’t.”
The Fed said it expects the economy to slow to a crawl and unemployment to rise to a degree historically associated with a recession – a possibility looming larger than ever in the eurozone and seen as highly likely in Britain.
The Bank of England raised interest rates and said it would continue to “respond aggressively, as necessary” to inflation, despite the economy entering a recession.
“For borrowers, this would mean a significant rise in costs again and yet there is no real control over the rising cost of living,” said Emma Lou Montgomery, associate director at Fidelity International.
Global stocks tumbled near two-year lows and emerging market currencies tumbled as investors prepared for a world of scarce growth and hard credit. [MKTS/GLOB]
Market participants also raised their expectations for the interest rates of the European Central Bank, which will almost certainly raise again on October 23. It is now expected to raise its interest rate to nearly 3% next year from 0.75% now.
Japan has chosen to keep its rates near zero to support the country’s fragile economic recovery, but many analysts believe its position is increasingly unsustainable given the global shift to higher borrowing costs.
Bank of Japan Governor Haruhiko Kuroda said after the monetary policy decision, “There is absolutely no change in our stance of maintaining easy monetary policy for now. We will not raise interest rates for some time.”
But the yen fell against the dollar after the decision, forcing the Japanese authorities to step in and buy the local currency in an attempt to stem the slide.
Meanwhile, Turkey’s central bank continued its unorthodox policy on Thursday with another surprise rate cut even though inflation reached more than 80%, sending the lira to an all-time low against the dollar.