Concerns about rising inflation and faltering economic growth pervaded financial markets during June and central banks around the world raised interest rates in a bid to curb inflationary pressures that have been exacerbated by the war in Ukraine.
- US rates rose by 50 basis points
- Eurozone rates set to rise in July
- US CPI hits 8.6% YoY
Fears of a downturn: concerns about rising inflation and faltering economic growth pervaded financial markets during June and central banks around the world raised interest rates in a bid to curb inflationary pressures that have been exacerbated by the war in Ukraine. The World Bank warned that the risk of stagflation – high inflation and low economic growth – had increased, observing: “For many countries, recession will be hard to avoid”.
“For many countries, recession will be hard to avoid” (The World Bank)
US rate increase: US Federal Reserve (Fed) policymakers raised the key federal funds rate by 75 basis points during June. This was the largest single rate increase since 1994 , which took US rates to a range of 1.5% to 1.75%. Further rate increases are widely expected to take place, with the next rise slated for the end of July . Looking further ahead, the Fed expects rates to rise to 3.4% by the end of this year.
US inflation continues to climb: the rate of consumer price inflation in the US accelerated to 8.6% in May, posting its highest 12-month increase since December 1981. The Dow Jones Industrial Average Index fell by 6.7% in June; meanwhile, the S&P 500 Index fell by 8.4% and entered its 15th bear market since 1928. During the month, the yield on the benchmark US Treasury Bond rose above 3.4% to reach its highest level since 2018.
ECB set to tighten: the eurozone is set to experience its first rate increase in over 11 years during July, following the European Central Bank’s (ECB’s) announcement that it intends to raise its key interest rate by 25 basis points in a bid to tackle inflation. ECB policymakers warned: “High inflation is a major challenge for all of us”: the rate of inflation in the eurozone hit 8.1% in May and is expected to remain “undesirably elevated for some time” . The Dax Index fell by 11.2% during June.
Japan bucks the trend: while many of the world’s major central banks raised borrowing costs during June, the Bank of Japan remained committed to its longstanding programme of negative interest rates and bond purchases. Unlike many other countries, Japan’s inflationary backdrop has remained benign: its rate of consumer price inflation rose to 2.5% year on year during May . The Nikkei 225 Index declined by 3.3% over June as the yen’s weakness undermined sentiment towards large Japanese exporters.
To view the series of market updates through June, click here