Central banks rate hikes cycle, turning into currencies war

Last week three central banks raised their interest rates, two of which surprised the markets. The Federal Reserve of the United States increased its interest rate by 0.75%, vs. an expectation of a 0.50% hike. The Switzerland National Bank (SNB) raised its rate by 0.50%, from the previous -0.75% to -0.25%, which was a total shock for the markets. The market participants expected SNB to hike the interest rates this year, but they didn’t expect it for June nor by 0.50%.

The Bank of England also raised the UK interest rate from +1.00% to + 1.25%. 

Looking ahead, we have the following Central Banks expected to increase their interest rate in July:

• 05, July 2022 – The Reserve Bank of Australia Interest rate decision
• 13, July 2022 – The Reserve Bank of New Zealand Interest Rate Decision 
• 13, July 2022 – Bank of Canada Monetary Policy Report
•  21, July 2022 – European Central Bank (ECB) Interest Rate Decision 
• 27, July 2022 – The Federal Reserve of the United States Interest Rate Decision

The global financial tightening is continuing with most major central banks in the world raising interest rates to fight the skyrocketing inflation, and none of them are willing to import more inflation by weakening their currency too much. Remember the period between 2008 and 2011 when all Central Banks were racing to cut interest rates and weaken their currencies, engaging in a currency war, and trying to stimulate their economies. Now is the opposite Central Banks are increasing their interest rate, tightening credit conditions, and keeping their currency steady to avoid importing more inflation. Only the Bank of Japan is still in an easing cycle, welcoming the weakening of the JPY and the increasing inflation in Japan. Well, the Governor of the Bank of England, Andrew Bailey, for some reason decided to talk down the GBP in May during an interview for major financial media, when he predicted a recession in the UK in the fourth quarter of 2022.

During the FED press conference on June 15, 2022, Chairman Powell expressed the determination of the Central Bank to bring down inflation. Chairman Powell went even further by saying that the Central bank expects and welcomes an increase in the unemployment rate in order to balance the labor market. Powel even advised young couples, who are looking to buy their first home, to wait for the housing market to normalize.