The world’s financial markets are preparing for the sharpest rise in U.S. interest rates in nearly 30 years as the US central bank took steps to curb rising inflation.
After days of frantic investor speculation and signs of growing central bank anxiety, the Federal Reserve is expected to raise the official cost of the loan by 0.75 percentage points for the first time since 1994.
The Fed meeting, with an interest rate announcement scheduled for 7pm in the UK on Wednesday, was preceded by an emergency meeting of the European Central Bank (ECB) to discuss falling bond prices Italy, Spain, Portugal and Greece.
After disappointing markets for not acting at a meeting scheduled for last week, the ECB’s board said it would take two steps to prevent the fragmentation of the eurozone.
The Frankfurt-based central bank said it was developing a new support tool and would also direct its overdue debt into a € 1.7 trillion pandemic support scheme recently completed to vulnerable countries. eurozone.
“The pandemic has left lasting vulnerabilities in the eurozone economy that in fact contribute to the uneven transmission of the normalization of our monetary policy between jurisdictions,” the ECB said in a statement.
The Bank of England is expected to raise UK interest rates on Thursday, following rising UK inflation to a 40-year high. Despite some speculation about an increase of 0.5 points, the City Council expects an increase of 0.25 points to 1.25%.
Fed Chairman Jerome Powell had previously ruled out a 0.75-point increase, but it looks like the central bank has changed its mind after last week’s higher-than-expected US inflation was announced.
The news that the US measure of the cost of living had reached 8.6%, the highest in four decades, led to a sharp sale of bonds and stock prices, as investors were frightened by the possibility of action to combat the high inflation that would lead to the recession.
The S&P 500 index, a broad measure of the health of the US stock market, fell 20% from its peak in January, while the technology-rich Nasdaq index fell one-third.
“Investors have fully aligned themselves with the view that the Fed will rise 0.75 points today, following the unexpected acceleration of inflation and inflation expectations in May and media reports suggesting that the option it was being discussed by policymakers, “ING Bank analysts said.
“Although a move of 75 basis points is not certain, we doubt that these potential” leaks “in the media are a coincidence, and they seem to us an attempt (success) to adjust expectations during the shutdown period and prepare the markets for the biggest increase ”.
The prospect of a larger-than-expected jump in US interest rates, coupled with weak growth in the UK, pushed the pound to its lowest level in two years against the US dollar. -American.
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Markets.com analyst Neil Wilson said of the ECB’s move: “Given that there was a meeting scheduled for last week, it smells of panic and lack of control, but the market is happy to see it. “European banks’ shares rose and the euro also rebounded, while Italian yields fell again.”
Andrew Kenningham, Europe’s chief economist at Capital Economics, said: “News of the ECB’s governing council holding an emergency meeting today shows that political leaders are taking the threat of Peripheral yields rise more seriously than last Thursday at its regular political meeting. ”
The Fed’s statement and Powell’s remarks at a news conference immediately afterwards will be looked at to see if further sharp increases in US rates are likely. Some analysts expect the central bank to raise 0.75 points again next month.