Global move on interest rates sends shudders through markets

The Bank of England (BoE) kept its foot on the monetary brake on Thursday, announcing another half point interest rate hike, its seventh consecutive rate increase, as it fights to combat soaring prices and sagging consumer sentiment.

Despite suggesting the UK economy was already in recession, the BoE’s nine-member monetary policy committee voted to increase its key base rate by 0.5 percentage points to 2.25 per cent — its highest level since 2008 — suggesting the risk of inflation becoming entrenched now outweighed the short-term dangers to the economy.

The Swiss National Bank, the only central bank in Europe that still had negative interest rates before yesterday, also announced a 75 basis point rate hike to bring borrowing costs above zero for the first time in almost eight years. The increase takes Switzerland’s policy rate to 0.5 per cent and represents the bank’s most aggressive tightening action in two decades.

Both announcements came in the wake of the US Federal Reserve’s overnight move to increase its key interest rate by another 0.75 percentage points to 3 per cent, a level last seen in early 2008, while promising that its monetary tightening would not stop there. US policymakers now expect the Fed’s headline interest rate to reach 4.4 per cent by the end of the year — and rise further in 2023, sharply higher than forecast.

‘Let us wake up’: Macron warns of far-right on German trip as he and Scholz wrangle over hard issues

---

Weddings, rent and houses: What are the tax implications of a range of gifts to children?

---

Exile by Aimée Walsh: Haunted territories, hidden trauma

---

Gerry Thornley: Danger of mental scarring for Leinster following latest gut-wrenching final defeat

---

The strength of the rate hikes being adopted by central banks across the globe sent shockwaves through financial markets amid fears that higher rates, which eventually translate into more expensive mortgages, loans and credit card debt for consumers, could trigger a bigger global downturn than previously forecast.

Most market indices posted their third straight day of declines on Thursday.

Budget 2023: What to expect

Listen | 51:50

The BoE estimates the UK’s economy will shrink 0.1 per cent in the third quarter — partly due to the extra public holiday for Queen Elizabeth’s funeral — which, combined with a fall in output in the second quarter, meets the definition of a technical recession.

The state of flux that the British economy is in was evident in a rare three-way split among the Bank of England’s nine-person rate-setting committee. Five policymakers voted to increase rates by half a point, the same move as the previous meeting; three wanted a more aggressive increase of three-quarters of a point; and one person voted for just a quarter-point increase, arguing that economic activity was already weakening and future inflation risks were waning.

Since the bank’s last policy meeting in August, major changes to government policy have altered the outlook for inflation. This month, a new government, led by prime minister Liz Truss, took over. Amid concerns about the ruinous impact of rising energy costs for households and businesses, the government has moved to cap bills for both. The immediate effect is that inflation in the UK is expected to peak sooner and at a much lower rate.

The BoE said it expected the annual inflation rate to peak at just under 11 per cent next month. The freeze on household energy bills has lowered its forecast for the peak in inflation by about 5 percentage points.

Outspoken European Central Bank (ECB) board member Isabel Schnabel, meanwhile, said she expected euro zone inflation go higher than previously predicted while defending the ECB’s plans to raise interest rates further. The ECB has lifted rates by a combined 125 basis points over its last two meetings to combat inflation that is nearing 10 per cent across the euro area, and markets have priced in further increases at each of the ECB’s meetings through next spring.

“There are reasons to believe that inflation may even go up a bit further over the short term,” Ms Schnabel told a conference organised by financial firm Spuerkeess of Luxembourg.

“Inflation may actually be more persistent than we originally thought,” she said, adding that price growth has broadened out and there is now a large share of goods with price growth over 3 per cent. – Additional reporting by Reuters