UK and Norway Big Step
Turkiye's Sharp Tightening Shift After 2 Years
Major European countries including the United Kingdom, Switzerland, and Norway have implemented surprise tightening measures that exceeded market expectations. As the inflation fire engulfing Europe remains uncontrolled, forecasts for terminal interest rates are steadily rising.
The Bank of England (BOE), the UK's central bank, raised its benchmark interest rate by 0.5 percentage points from the current 4.5% to 5.0% at its monetary policy meeting on the 22nd (local time). The rate hike was twice the market expectation of 0.25 percentage points. The current rate of 5.0% is the highest level in 15 years since the global financial crisis in 2008. Since December 2021, when it was the first among major European countries to begin tightening, the BOE has continuously tightened monetary policy without a single pause for one and a half years. At that time, the rate was at a record low of 0.1%.
The BOE's surprise tightening, which was twice the market expectation, is due to renewed inflationary pressures. The day before, the UK Office for National Statistics announced that the consumer price inflation rate for May was 8.7% year-on-year. This far exceeded the market expectation of 8.4%, with the UK's inflation rate surpassing market forecasts for four consecutive months. Since August last year (10.1%), when the UK experienced double-digit inflation, the rate fell to single digits in May (8.7%), but the pace of deceleration is slowing. The core CPI inflation rate, excluding volatile energy and food prices, also rose to 7.1% from 6.8% the previous month. This is the highest level in 31 years since March 1992.
As inflationary momentum shows no signs of abating easily, market interest rate forecasts are being revised upward. The previous forecast that the UK’s rate hike cycle would peak at around 5% per annum has been revised to 6%. On Wall Street, it is expected that the BOE may implement more aggressive tightening, including an additional 0.75 percentage point increase over the next two monetary policy meetings. Goldman Sachs also revised its rate forecast on the same day, predicting that "the BOE will take another big step in August."
Despite concerns about an economic recession, the BOE remains resolute in its commitment to controlling inflation. Andrew Bailey, Governor of the BOE, stated, "There is no room for compromise on the necessity to ease inflation," adding, "We do not wish for a recession, but we will take all necessary measures to bring inflation down to target levels."
Jamie Niven, a fund manager at Candriam, evaluated that "the BOE has acknowledged that it is even considering enduring a recession to achieve the inflation target." Bloomberg Economics expects that the UK will enter a recession phase once the benchmark interest rate reaches the 6% range.
As the phase of high-intensity rate hikes continues, financial market risks are also increasing. In particular, with interest payments swelling due to prolonged rate hikes, mortgages have emerged as a time bomb in the financial market. Mortgage interest rates in the UK have more than tripled since March last year, but the UK government is refraining from market intervention to control inflation.
Joseph Little, Global Chief Analyst at HSBC Asset Management, said, "The UK is in the worst situation among major Western economies," adding, "Mortgage pressure and interest rate resets every two years are causing a sharp increase in borrowers' interest burdens, and if this situation continues, a recession will be unavoidable around next year."
On the same day, the central banks of Switzerland and Norway raised their benchmark interest rates by 0.25 percentage points and 0.50 percentage points, respectively. Switzerland ended its negative interest rate era of -0.25% in June last year through rapid rate hikes over the past year, raising the benchmark rate to 1.75%. Thomas Jordan, Governor of the Swiss National Bank, indicated in an interview with Bloomberg TV that "(this hike) is not the end," suggesting further increases.
The Norges Bank, Norway's central bank, stated that "inflation significantly exceeds the target (2%) and wage growth is expected to be higher than last year," adding that "there will be another rate hike in August." Market forecasts for Norway’s current upper rate of 3.75% continue to rise.
Additionally, T?rkiye raised its benchmark interest rate by a whopping 6.50 percentage points to 15.00% on the same day. The Central Bank of T?rkiye stated that it will "strengthen tightening in a timely and gradual manner until inflation forecasts significantly improve." T?rkiye had experienced a brutal inflation rate of around 80% for years due to expansionary monetary policies, but President Recep Tayyip Erdo?an, seeking re-election in this year’s presidential election, delayed tightening and implemented a surprise tightening for the first time in two years since March 2021.
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