Inflation continues to weigh heavy

Fears of a recession have increased lately as the Federal Reserve tries to combat surging inflation with aggressive rate hikes, resulting in volatile risk sentiment around the world

While everyone was talking endlessly about inflation and the war, the US Federal Reserve added to the worries of people all over the world by inducing talks of the most feared word in the masses – recession. In the past two weeks the markets have wound down and have made a comeback on what seemed to be the worst weeks following the interest rate hike. The US equity indices have fluctuated tremendously where the Dow Jones is down by 8.92 per cent, the S and P 500 has gained just 4.01 per cent and the tech-heavy Nasdaq saw some major technology stocks underperforming the markets and has gained just 6.62 per cent

The crude oil prices also oscillated and gained over 9.34 per cent in the past few weeks, trading in the range of USD 107-112 per barrel. The Federal Reserve on June 15 launched its biggest tool yet against inflation, raising benchmark interest rates three-quarters of a percentage point in a move that equates to the most aggressive hike since 1994. Ending weeks of speculation, the rate-setting Federal Open Market Committee took the level of its benchmark funds rate to a range of 1.5-1.75 per cent, the highest since just before the pandemic began in March 2020.

The London’s FTSE 100 has slightly fared the headwinds. The FTSE ended just 0.73 higher in the past two weeks. UK interest rates have risen again as the Bank of England attempted to stem the pace of soaring prices. The BoE increased from rates from 1 per cent to 1.25 per cent, the fifth consecutive rise, pushing them to the highest level in 13 years. This is because finances are being squeezed by the rising cost of living, driven by record fuel and energy prices. The bank said rising energy prices were expected to drive living costs even more.

The governing council will make sure that inflation returns to its 2 per cent target over the medium term. The scale, pace and timing of any further hikes however depend on the economic outlook and inflationary pressures. Fears of a recession have increased lately as the Federal Reserve tries to combat surging inflation with aggressive rate hikes, resulting in volatile risk sentiment around the world. Russia’s unjustified aggression towards Ukraine continues to weigh on the economy in Europe and beyond. It is disrupting trade, leading to shortages of materials, and is contributing to high energy and commodity prices.

These factors will continue to weigh on confidence and dampen growth, especially in the near term. However, the conditions are in place for the economy to continue to grow on account of the ongoing reopening of the economy, a strong labour market, fiscal support and savings built up during the pandemic. Once the current headwinds abate, economic activity is expected to pick up again. Even the European Central Bank has informed that it will carry out the first interest rate hike in 11 years in the month of July, followed by another hike in September, citing inflation challenges.

The bank is targeting 2 per cent hike as of now. The DAX index also underperformed in the past fortnight and is down by 1.79 per cent. On the other hand, The People’s Bank of China kept its lending rate unchanged despite the rate hike by the US Federal Reserve. The one-year loan prime rate was kept at 2.85 per cent. The bank also stated that it wants to avoid further policy divergence from the US that could add pressure on the yuan. Australia’s central bank also lifted its benchmark interest rate for the second time in five weeks in June, changing the cash rate to 0.85 per cent from 0.35 per cent, and has hinted for further rate hike.

On the other hand, The Bank of Japan on June 17 maintained ultra-low interest rates and has kept its borrowing costs at ‘present or lower’ levels, signalling its resolve to focus on supporting the economy’s tepid recovery from the pandemic. The Bank of Japan maintained its -0.1 per cent target for short-term rates and its pledge to guide the 10-year yield at around 0 per cent by 8-1 vote. The decision was widely expected, but leaves the BOJ’s stance even more at odds with other major central banks, which are aggressively tightening the policy to curb surging inflation. The Nikkei index was bearish by 0.43 per cent in the past two weeks.