In the news: Interest rates surge worldwide

Central banks worldwide are raising interest rates to combat inflation
by Brian Gorman


On 21 September 2022, the US Federal Reserve announced its third consecutive interest rate rise of 0.75 of a percentage point, lifting the benchmark federal funds rate 3–3.25%. This is the highest level since 2008. The Fed has indicated that further increases are on the way, according to an article in the Wall Street Journal by Nick Timiraos.

Inflation has risen to multi-year highs in many of the world’s biggest economies. The war in Ukraine has sent energy costs soaring. With many countries now unwilling to buy from Russia, they have had to buy from other sources at higher prices. Food prices, especially wheat, have also been affected by the war.

“We have got to get inflation behind us,” said Fed chair Jerome Powell after the rates decision. “I wish there were a painless way to do that. There isn’t.”

Officials project that rate rises will continue into 2023, “with most expecting the federal funds rate to rest around 4.6% by the end of next year,” writes Timiraos.

Bank of England acts

The UK is also trying to combat inflation. The consumer price index rose 10.1% in the year to July 2022, the highest rate in 40 years, according to the Office for National Statistics, then dropped slightly to 9.9% in the year to August 2022

On 22 September 2022, the Bank of England acted, albeit to a lesser degree than the Fed. The Bank’s Monetary Policy Committee (MPC) raised its base rate by half a percentage point to 2.25%, the highest level in 14 years. The MPC’s decision was split, with three of the nine members voting for a 0.75 percentage point rise. Most commentators expect further hikes before the end of the year.

The impact on homeowners with mortgages was discussed in an article in Yahoo Finance by Suban Abdulla. It cites figures from credit broker TotalMoney and personal finance website Moneycomms for the average UK house costing £270,708, with a 75% loan-to-value. Assuming a 75-basis point rise, which many in the market had been expecting, this could see tracker mortgage repayments cost £274 per month more than in November 2021.

"Another increase to the base rate will pile pressure on the finances of over two million homeowners who may already be struggling with the soaring cost of living," Alastair Douglas, CEO of TotallyMoney, is reported to have said. "The latest interest rate hike is being closely followed by a new, higher energy price cap, further compounding pressure just as we head into the cold winter months."

In the US, stock markets have been a casualty of the worries about inflation and higher rates. The S&P 500 fell 1.7% on 21 September, even though the news about rates was widely expected. The benchmark index has fallen some 20% in 2022 and is on course for its biggest loss since 2008.

Bonds have been hit worse. The yield on the two-year US Treasury note settled around 3.993% on 21 September, according to the Wall Street Journal article – nearly a 15-year high.

Benefits for savers and exporters to the US

Although those with mortgages and businesses looking to borrow will feel some pain, it is worth remembering that savers, and businesses with net cash, will welcome higher interest rates. In recent times, they have seen the value of their cash eroded by inflation, as banks have cut the interest rates they pay savers to anaemic levels.

The Fed’s aggressive stance in raising rates faster than the Bank of England has boosted the US dollar, which has risen to a 37-year high against the pound, according to an article in Yahoo News. It’s also at its highest rate against the euro for more than 20 years. While that’s bad news for tourists, there is an upside for businesses in the UK and the eurozone exporting goods to the US, and it will also boost the tourist industry in Europe.

The interest rate hikes come after many years of record low rates. According to a Vox article by Matthew Yglesias, central banks cut rates drastically in the late 2000s during the financial crisis and most central banks’ rates are well below their record highs. In 1979, the rate hit 17%.  

Switzerland has also raised its base interest rate, according to a Reuters article by John Revill and Silke Koltrowitz, but this follows seven and a half years of negative rates. The Swiss National Bank (SNB) raised its policy interest rate by 0.75 of a percentage point, to 0.5%, from minus 0.25%, the article says. This follows a 50-basis point hike in June 2022 from -0.75%, the SNB's first rate hike in 15 years.

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Published: 23 Sep 2022
  • Risk
  • Corporate finance
  • interest rates
  • Federal Reserve

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