The fight against inflation intensified this week as central banks stepped up their efforts to cool rising prices, and a global recession could be the price we pay.
Investors reeled from the biggest rise in US interest rates in almost three decades, before Switzerland piled in with a shock increase in its borrowing costs, topped off by the fifth rise in a row from the Bank of England.
This flurry of rate hikes showed that central bankers are deeply worried by the threat of red-hot inflation, and prepared to plunge the world economy into a downturn to cool it.
This hawkishness sent global stock markets tumbling to their lowest point in over 18 months, in the biggest weekly drop since March 2020 as markets entered “extreme bearish” territory.
America’s benchmark S&P 500 index fell into a bear market, 20% off its peak, hammering home that markets are in a steep, sustained downturn that could signal a recession.
“The more aggressive line by central banks adds to headwinds for both economic growth and equities,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
“The risks of a recession are rising, while achieving a soft landing for the US economy appears increasingly challenging.”
Currency and bond markets were also rocked this week, while oil and copper prices were hit by slowdown fears.
America’s central bank dramatically hardened its resolve with a 75-basis-point hike on Wednesday, after an unexpected surge in US consumer prices showed that inflation had still not peaked.
The chair of the Federal Reserve, Jerome Powell, denied trying to induce a recession, but said demand had to be reduced to cool wage rises. Inflation is “very painful for people” and many are only experiencing it seriously for the first time, he told reporters.
Richard Hodges, manager of the $3.6bn (£2.9bn) Nomura Global Dynamic bond fund, said the Fed was orchestrating a recession as it focused solely on reducing US inflation from its 40-year high of 8.6% in May.
The Fed aims to rebalance the differential between post-pandemic, pent-up demand and Russia-Ukraine, Covid-hampered supply by reducing demand, said Hodges, who predicted that higher borrowing costs would hit the US economy fast.
“In the latter part of this year, the economy will slow as the US consumer becomes increasingly squeezed by higher prices, a weak housing market and, to an extent, reduced employment certainty,” Hodges added.
Switzerland’s central bank, the Swiss National Bank (SNB), sent shockwaves through global markets on Thursday with its first interest rate rise since 2007. The measure triggered a surge in the Swiss franc, and volatility through the foreign exchange markets, with the SNB saying it would hike further if needed.
“It was probably the SNB that broke the camel’s back, because if the Swiss are worried about inflation, we all should be,” said Jeffrey Halley, a senior market analyst at the financial trading firm Oanda.
Compared with the drama in Washington DC and Zurich, the Bank of England’s quarter-point rate rise on Thursday looked relatively tame. But Threadneedle Street also pledged to act “forcefully” if needed, prompting many economists to predict borrowers could be hit with a half-point hike in August. That would be the biggest rise in UK interest rates since 1995.
Recession fears pushed the pound to a two-year low this week, leaving sterling down about 10% against the US dollar so far this year.
Only the Bank of Japan bucked the trend. It stuck with its ultra-accommodative stance on Friday morning – and saw the yen promptly tumble 2% back towards this week’s 24-year low against the US dollar.
A global recession is already coming, warned Robin Brooks, chief economist at the Institute of International Finance. He said the US faces a downturn in manufacturing and housing.
Despite the tumble in…