The week central banks spooked the markets

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Global stock markets today were on track for their worst week since the depths of the pandemic after central banks across the world took a hawkish shift in their battle against inflation.

The Bank of England and the Swiss National Bank both increased rates yesterday, following Wednesday’s announcement by the US Federal Reserve of a 0.75 percentage points rise, its biggest in decades.

The Fed decision and renewed fears of a global downturn have led investors to pull billions of dollars out of corporate bond funds in what has also been a bruising week for fund managers.

The European Central Bank meanwhile said it would speed up work on a new “anti-fragmentation instrument” to help address surging borrowing costs in the eurozone’s weaker economies. The news helped Italy’s debt rebound after a heavy-sell off.

Japan remains an outlier. The country’s central bank today announced it would stick to its ultra-loose monetary policy and leave rates on hold, keeping bond yields at zero. The yen sank in response.

The Bank of Japan, unlike its counterparts in Europe and the US, believes the current surge in inflation is transitory. The BoE by contrast yesterday increased its forecast, suggesting CPI would top 11 per cent by the end of the year.

It has however been accused of “going soft” on its core mandate after adopting a less aggressive stance than the Fed. This reflects its view that the UK economy will barely grow at all in the next three years, says economics editor Chris Giles.

Traders meanwhile are braced for more volatility ahead.

“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…

Read more at www.ft.com

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