[Comprehensive] Following US Fed, UK and Switzerland Raise Interest Rates One After Another... Stock Market Falters

[Image source=AP Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Following the U.S. Federal Reserve's (Fed) three consecutive giant steps (0.75 percentage point rate hikes), major countries have also joined the rate hike trend. As the global tightening momentum accelerates, concerns over a worldwide economic recession are growing. Due to simultaneous tightening by major countries, key indices on the New York Stock Exchange closed lower across the board on the 22nd (local time). Government bond yields surged, and the dollar continued to strengthen.

◆Following Fed's Giant Step, Successive Rate Hikes

The Bank of England (BOE), the central bank of the United Kingdom, held a Monetary Policy Committee (MPC) meeting and announced a 0.5 percentage point increase in the base rate from 1.75% to 2.25%. Having been the first among major central banks to enter a tightening cycle last December, the BOE has now raised rates seven consecutive times including this one.

Specifically, among the nine policy committee members, five agreed to a 0.5 percentage point hike, three supported a 0.75 percentage point hike, and one favored a 0.25 percentage point increase. There are also expectations that if soaring inflation is not controlled, the next MPC meeting in November could see a giant step exceeding a big step (0.5 percentage point hike).

On the same day, the Swiss National Bank (SNB) raised its base rate by 0.75 percentage points, ending the era of negative interest rates in Europe. Switzerland's base rate rose from -0.25% to 0.5%. Switzerland had maintained negative rates since January 2015. The SNB confirmed that this rate hike was due to inflationary pressures.

The Norges Bank also raised its base rate from 1.75% to 2.25%, a 0.50 percentage point increase. The Norges Bank indicated that since inflation is rising faster than expected, it may raise rates again at the November meeting. Earlier, on the 20th, Sweden drew attention by making a bold move to raise rates by 1 percentage point at once.

In the Asian market, Hong Kong raised rates by 0.75 percentage points. Hong Kong operates a 'dollar peg system' linking the Hong Kong dollar's value to the U.S. dollar. The Philippines also raised its rate by 0.5 percentage points to 4.25%. Taiwan, which has continued tightening in two monetary policy meetings earlier this year, also implemented a 0.125 percentage point hike.

Indonesia raised the 7-day reverse repurchase agreement (RRP) rate, used as the base rate, to 4.25%. This was a 0.5 percentage point increase, double the initially expected 0.25 percentage points. Deposit and loan interest rates for banks were also raised by 0.5 percentage points to 3.5% and 5.0%, respectively.

However, Japan decided at the Monetary Policy Meeting held on the same day to keep short-term rates at -0.1% and maintain its existing ultra-low interest rate monetary easing policy. The Bank of Japan will purchase long-term government bonds without limit to guide the 10-year government bond yield, a long-term rate indicator, to around 0%. Bank of Japan Governor Haruhiko Kuroda stated at a subsequent press conference, "There will be no rate hikes for the time being," and emphasized, "The negative interest rate policy is not causing significant side effects or problems." Brazil, which had raised its base rate 12 consecutive times, kept the rate steady at 13.75% at its meeting on the same day.

Meanwhile, the Bank of Korea is scheduled to hold a Monetary Policy Committee meeting on the 12th of next month to decide the base rate. Following the Fed's three consecutive giant steps, the U.S. base rate once again surpassed Korea's. After the Bank of Korea raised rates by 0.25 percentage points last month, the rates were equalized, but the gap widened again to 0.75 percentage points within a month. If the interest rate inversion between Korea and the U.S. continues long-term, capital outflows by foreign investors and won depreciation are inevitable. Furthermore, won depreciation is also considered a factor that fuels inflation.

◆Stock Markets Fall Amid Successive Tightening... Recession Fears Persist

With high interest rates expected to continue for some time, stock prices continued to decline. Earlier, the Fed projected a median interest rate of 4.4% by the end of this year through its dot plot. It also forecasted a rise to 4.6% next year. This reconfirmed that high-intensity tightening to curb inflation will persist for a while.

On this day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 0.35% from the previous session. The S&P 500 index, centered on large-cap stocks, closed down 0.84% at 3757.99, and the tech-heavy Nasdaq index ended 1.37% lower at 11,066.81. Syra Malik, Chief Investment Officer at Nuveen, described the previous day's FOMC as "a pill the market finds hard to swallow." Evercore ISI lowered its year-end forecast for the S&P 500 from 4200 to 3975 on the same day.

Major European stock markets also fell across the board. Germany's Frankfurt DAX index dropped 1.84%, France's CAC40 fell 1.87%, and the pan-European Stoxx 50 declined 1.85%. The UK's FTSE 100 closed down 1.08%. Switzerland, which ended its negative interest rate era, saw its SMI index plunge to the lowest level since November 2020. It has fallen 21% from its peak in December, entering a technical bear market.

Joshua Mahoney, Senior Market Analyst at online trading platform IG, said, "It was a week dominated by central banks. Today’s markets had to endure another round of declines across Europe and the U.S.," adding, "Geopolitical and economic concerns dragged down risk asset prices."

Concerns over a recession have intensified. In the New York bond market, government bond yields surged. The 10-year Treasury yield rose to as high as 3.716% during the session. The 2-year yield, sensitive to monetary policy, hovered around 4.11%. The inversion spread between 2-year and 10-year yields widened further, typically seen as a precursor to recession. At one point during the session, the spread widened to 56.8 basis points (1bp=0.01 percentage point).

Ed Moya of OANDA said, "The Fed has opened the door for most of the world to continue aggressive rate hikes," expressing concern that "this will lead to a global recession." Keith Lerner of Truist noted that while many economists expect a mild recession, "there is some merit to that," but warned, "the uncertainty of Fed policy means the recession could last longer."

Following the Fed's three consecutive giant steps, the dollar continued to strengthen. The Dollar Index, which measures the value of the dollar against six major currencies, rose slightly to around 111.24. The euro's value against the dollar fell to as low as $0.9806 during the session.