The interest rate hikes keep on coming and this trend is almost certainly going to remain intact in early 2023. The Federal Reserve has lifted US rates to the highest level since 2007 at 4.25%-4.5%, and while the pace of the rate hikes has slowed, the headline rate is unlikely to have peaked for now.
The Bank of England is following a similar playbook – keep raising interest rates to combat inflation. We’ll find out later today how much it is prepared to lift the cost of borrowing, most likely a 50 basis-point increase to 3.5%.
Even though there are signs of inflation easing, it remains significantly higher than both the Fed and Bank of England’s 2% target. The jobs market is also too strong to suggest that the central banks will halt further rate rises.
Raising rates makes it more expensive for consumers and businesses to borrow money and theoretically causes a reduction in spending and investment which should help to ease the economy and bring down prices. This takes time to work its way through the system and so central banks will continue their rate hiking path until there is adequate evidence to support a shift in policy.
Russ Mould, investment director at AJ Bell, said: “Investors have been eagerly awaiting this so-called pivot and comments from the Fed yesterday poured cold water over any idea of it happening soon. Markets reacted as you might have expected, with a 0.6% decline in the S&P 500 and a 0.8% drop in the Nasdaq.
“The FTSE 100 got off to a bad start on Thursday with a 0.8% decline to 7,439. Defensive sectors like tobacco and pharmaceuticals tried their very best to prop up the market but the headwinds were too strong elsewhere, with banking, energy and mining acting like an anchor on stocks.”