nvestors from London to New York and beyond are absorbing news of the third consecutive 0.75% rate hike from Washington in a move that shows the extent of the global fight against inflation.
The Bank of England moves into the spotlight, with a delayed announcement due at midday on Thursday that is expected to be of the same margin. The decision was put back a week after the death of Queen Elizabeth II.
The biggest central bank of them all – The Federal Reserve – stuck with the 0.75% margin in a unanimous vote on Wednesday, stopping short of a super-sized 1% move, which some experts in the City and Wall Street had predicted.
Jerome Powell, the Fed’s chairman, has repeatedly signalled his determination to tame inflation. Relatively robust economic data looks to give him more room for further aggressive action, while the latest reading of the US consumer price index (CPI) rose again last week, failing to meet hopes that it would show the first decline since May 2020.
Analysts say the lack of a clear sign that the Fed’s anti-inflation medicine has started to work in the last CPI left the way for an even bigger rise.
But into the start of trade on Wednesday, the CME’s Fedwatch tool put an 84% chance on the Federal Open Market Committee (FOMC) sticking with a hike of 0.75%.
Speaking before the announcement, Greg Anderson, Director, global head of FX strategy at the Bank of Montreal, said: “We don’t think that Powell will push back against current market pricing, which basically has another 0.75% rate hike priced in.
“We would assign a lower probability to the Fed hiking by 1% than the 20% that is priced into money market curves.”
The dollar was stronger, with the index tracking it against a range of other currencies up 0.6%, taking its rise over the year to over 18%. The S&P 500 slipped back marginally on Wall Street, with the rise expected.
Russ Mould, investment director at AJ Bell, said: “The direction of interest rates is seen as vitally important to how investors allocate their capital between different asset classes, such as bonds, shares, property, commodities and cash. The return available on cash, and by extension the risk-free rate available on Government benchmark bonds, sets the reference point by which the attractiveness or otherwise of all asset classes will be judged,” he said.
“Markets are pricing in a peak of around 4.50% by the FOMC meeting of May 2023, before the first cuts come in the second half of next year,” Mould added.
The Fed adopted the 0.75% hike in June, for the first time since 1994. That came as a relief to stock market investors, where rising rates cause volatility and can improve the returns on offer from investment that are less risky than shares.
The Fed has lifted rates at every single one of its meetings since March in the biggest rate tightening cycle since the 1980s, taking its target range for the Fed funds rates to a range of 3.00% to 3.25%.
In 2020, CPI inflation was at 1.4%. It reached 7% in 2021.