Markets Digest Central Banks' Decisions
22 September 2022
Market volatility remains elevated as several of the most significant central banks decide about monetary policy this week.
Fed delivers another rate hike
After the US Federal Reserve induced volatility across the board in foreign exchange, the dollar has dominated. As expected, the American central bank increased the benchmark rate by 75 basis points to 3.25%, as officials remained committed to bringing inflation down to the desired level.
The PCE price index is now projected to be at 5.4% this year, and 2.8% in 2023 by the Fed, which also revised its inflation estimates upward at the same time. It won't be until 2024 when it reaches the 2% target. Growth was revised lower, with the near-term reduction being the steepest.
The Gross Domestic Product is now estimated to be 0.2% for this year, down from 1.7%, although it is expected to be above 1% in the following years. Finally, the median projection is for the federal funds rate to increase to 4.6% from 3.8% by the end of 2023.
BoJ remains as dovish as possible
However, earlier on Thursday, the Bank of Japan decided to maintain its ultra-loose monetary policy, demonstrating its continued commitment to bolstering the country's economy despite rising inflation. As a result, the USDJPY pair rose more than 1%, jumping to 146 for the first time since September 1998.
Japanese officials have been talking about intervention since the yen's 20% decline versus the dollar this year. Masato Kanda, vice minister of finance for foreign affairs, reiterated this on Thursday, saying that while Japan has not yet intervened in the currency market, it "very surely" will do so when necessary.
BoE expected to increase rates
Later in the afternoon, the BoE is anticipated to raise interest rates for the sixth meeting in a row, with a hike of 75 basis points to match the Fed's action, which is now the market favorite.
Given that the Bank of England predicts the country to be in a deep recession by the end of the year and that the government will probably need to borrow heavily to pay for the recently announced support for businesses' energy costs, it is questionable whether today's hike will significantly help the pound.