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As central banks become more hawkish, global markets tremble

Image: Reuters Berita 24 English -  Expectations for how aggressively central banks would need to tighten monetary policy to combat rising ...

Image: Reuters

Berita 24 English -  Expectations for how aggressively central banks would need to tighten monetary policy to combat rising inflation have risen yet again, causing global markets and investors to tremble.

The Federal Reserve raised interest rates by 75 basis points in recent days, the greatest increase in nearly three decades, the Swiss National Bank raised rates for the first time in 15 years, and the Bank of England raised rates by another 25 basis points.

More risky moves are expected, according to investors. According to the CME's FedWatch, Fed funds futures in the United States were pricing in a 44.6 percent likelihood that the fed funds rate will reach 3.5 percent by the end of the year, up from the current 1.58 percent level. A week ago, that probability was less than 1%.

As central banks hurry to dismantle the monetary support measures that have helped propel asset prices higher for years, the increased hawkishness has fueled violent swings in global markets.

Concerns that the Fed's aggressive rate hike plan will push the economy into recession have grown in recent days, crushing stocks, which entered bear market territory earlier this week when the S&P 500 extended its loss from its all-time high to more than 20%. With a 6% decrease this week, the index is on track for its worst weekly drop since March 2020.

The Stoxx 600 index in Europe is down around 17% this year, while the Nikkei share average in Japan is down roughly 10%.

Rate expectations have shifted, causing large fluctuations in bond and currency markets. The ICE BofAML MOVE Index, which measures Treasury volatility, is at its highest level since March 2020, and the Deutsche Bank Currency Volatility Index, which measures predictions for currency gyrations, is also up this year.

Since last week's ECB meeting, markets have shifted their betting on rate hikes, with the ECB now projected to deliver a 25-bps boost in July and at least one 50-bps hike by September. Some analysts believe that the central bank's intentions to develop a new weapon to combat bond market stress will provide it more leeway to implement strong rate hikes if necessary.

Interest rates are expected to rise by roughly 272 basis points by July 2023, placing them at 2.1 percent. This compares to an increase to 1.5 percent by early-2024, which was priced at the beginning of June. 

Markets in Australia are bracing for the benchmark cash rate, currently 0.85 percent, to break 4% next year, despite central bank officials' prediction for rates to peak around 2.5 percent.

The benchmark rate in the United Kingdom has now reached its highest level since January 2009, when borrowing prices were reduced while the global financial crisis raged. The Bank of England raised rates for the seventh time since December, when it became the first major central bank to tighten monetary policy in the aftermath of the COVID-19 outbreak.

According to statistics from BofA Global Research, global central banks have raised rates 124 times this year, compared to 101 hikes for all of 2021 and six in 2020.

The Bank of Japan has bucked the trend by maintaining ultra-easy policy and pledging to buy 10-year bonds every day to keep borrowing prices stable.

Speculators betting on a final capitulation, on the other hand, appear unfazed. In the tussle between hedge funds and policymakers, the Japanese yen is dropping, the yield curve is bending out of shape, and the bond market is almost buckling.

Following the worst inflation many countries have seen in decades, tighter monetary policy is being implemented. In May, for example, consumer prices in the United States increased at their quickest rate since 1981.

According to a Goldman Sachs index that incorporates metrics including exchange rates, equity movements, and borrowing costs to build the most widely used financial conditions indices, higher rates, skyrocketing oil prices, and market turbulence are all contributing to the tightest financial conditions since 2009.

Businesses and consumers may be forced to cut back on their spending, saving, and investment plans as a result of tighter financial conditions. According to Goldman, a 100-basis-point tightening in conditions reduces growth by one percentage point the following year.

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