Global financial markets are bracing for the biggest hike in US interest rates in nearly 30 years as the US central bank moves to halt rising inflation.
After days of frenzied investor speculation and signs of growing central bank anxiety, the Federal Reserve is expected to raise the official cost of borrowing by 0.75 percentage points for the first time since 1994.
The Fed meeting, with an interest rate announcement scheduled for Wednesday at 7pm UK time, will be preceded by an emergency meeting of the European Central Bank (ECB) to discuss falling prices bonds in Italy, Spain, Portugal and Greece.
The Bank of England is expected to raise UK interest on Thursday, after UK inflation rose to its highest level in 40 years. Despite some speculation of a 0.5 point increase, the City expects an increase of 0.25 point to 1.25%.
Fed Chairman Jerome Powell previously ruled out a 0.75 point hike, but the central bank appears to have changed its mind after higher-than-expected US inflation was reported last week.
News that the U.S. cost-of-living measure had reached 8.6% – the highest level in four decades – prompted a sharp sell-off in bonds and stocks as investors spooked at the possibility of action to fight against high inflation leading to recession.
The S&P 500 index – a broad measure of the health of the US stock market – fell 20% since its peak in Januarywhile the tech-heavy Nasdaq index fell by a third.
“Investors are now fully aligned on the idea that the Fed will hike 0.75 points today, following the unexpected pick-up in inflation and inflation expectations in May and media reports suggesting the option was being discussed by policymakers,” ING Bank analysts said.
“While a 75 basis point move is not certain, we doubt such potential ‘leaks’ to the media are a coincidence, and they appear to us to be a (successful) attempt to adjust expectations during the period. prohibition and to prepare the markets for the larger increase.
The prospect of a bigger-than-expected jump in interest rates in the US, coupled with weak growth figures in the UK, pushed the pound to its lowest level in two years against the US dollar.
Neil Wilson, an analyst at Markets.com, said of the ECB’s decision: “Given there was a meeting scheduled for last week, it smacks of panic and a lack of control, but the market is happy. to see this happen European bank stocks rose and the euro also rebounded, while Italian yields fell.
Andrew Kenningham, chief economist for Europe at Capital Economics, said: “The news that the ECB Governing Council is holding an emergency meeting today shows that policymakers are taking the threat of higher yields peripherals more seriously than they were last Thursday at their regular policy meeting.”
The Fed’s statement and Powell’s remarks at a press conference immediately afterwards will be closely scrutinized to see if further significant US rate hikes are likely. Some analysts believe that the central bank will raise them again by 0.75 points next month.