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Will US and UK central banks raise interest rates despite the threat to growth?

Will the Federal Reserve raise interest rates for the first time since 2018?

The US Federal Reserve is expected to raise interest rates by 0.25 percentage points at its meeting next week, for the first time since lowering borrowing costs to zero at the start of the corona plague.

B Until Ahead of Congress earlier this month, Fed Chairman Jay Powell said the US Federal Reserve was ready to begin a series of rate hikes starting in March, despite Russia’s invasion of Ukraine and the subsequent economic downturn. Currently, the U.S. futures market is priced at a full quarter-point increase in March, with five more expected during the remaining six sessions this year. This will leave the Fed’s key interest rate at about 1.5% through December.

The hope is that higher interest rates will help suppress inflation, which in February Rise 7.9 percent year-on-year – the fastest pace in 40 years. Although it may curb some inflationary pressures, tighter monetary policy can not neutralize prices driven by external shocks like the Ukraine conflict, which has caused energy prices and other commodities to soar.

Powell is also expected to address concerns about U.S. economic growth. High energy prices are raising costs for companies and individuals. Tightening monetary policy too quickly in this environment could – in the worst case scenario – lead the U.S. into recession.

“In the face of a recession-facing inflation, I do not care how bad inflation is, the Fed does not want a recession because then it becomes everything they did with employment and recovery,” said Andy Brenner, head of the International Fixed Income Division at NatAlliance Securities.

“Inflation is going to get worse before it gets better. But the Fed is limited in how quickly it can raise interest rates,” he added. Kate Dugid

How will the Bank of England respond to the conflict in Ukraine?

Investors expect the Bank of England to raise interest rates for the third time since the epidemic next week, despite the threat to growth posed by Russia’s invasion of Ukraine.

Inflation in the UK reached a 30-year high of 5.5 percent In January, long before the impact of the dramatic rise in oil prices created by the outbreak of war and Western sanctions on Moscow was felt. Given the considerable minority in the BoE’s rate-setting committee voted in favor of a particularly large interest rate hike of half a percent last month, “there is some momentum for further hikes,” said Philip Shaw, chief economist at Investec.

“We see that at this point, e [BoE] “He is more concerned about higher inflation than the risk of economic weakness, especially when interest rates are still very low by historical standards,” Shaw said.

The BoE will hardly swim against the current. The European Central Bank announced last week a faster reduction in the volume of its asset purchase program, while the Fed is expected to raise interest rates.

Beyond Thursday’s meeting, the chances of further interest rate hikes probably depend on the extent to which oil price hikes flow to other areas of the economy, particularly wages. Markets are now preparing for five more interest rate hikes before the end of 2022.

The BoE “may well raise interest rates gradually until there are signs that the economy is slowing down, that inflationary pressures are likely to fall or that wage growth remains relatively modest,” Shaw said. Tommy Stabbington

Will the price of gold reach an all-time high?

Increased volatility in global financial markets since Russia’s invasion of Ukraine has encouraged investors to look again at gold as an asset of refuge, its traditional role in times of storm.

The gold price peaked at nearly $ 2,070 this week, trading within touching distance of an all-time high of $ 2,072.50 in August 2020, according to Refinitiv data. But he later withdrew below $ 2,000 – a major level of resistance – despite growing fighting across Ukraine, leading to questions about the longevity of the precious metal rally.

The rise of gold was supported by heavy acquisitions from stock exchange fund managers. Gold-backed ETFs have seen a significant increase in demand so far this month, with investors adding 96.2 tonnes to their total holdings at a cost of more than $ 6.1 billion by March 9th.

This brought net investor inflows to nearly $ 11 billion so far this year, pushing the value of assets held in gold ETFs to $ 240.5 billion, according to the World Gold Council, a trading body representing gold producers.

Geopolitical tensions have historically provided only a short-term boost to gold. But Sookie Cooper, a precious metals analyst at Standard Chartered Bank in New York, said there seems to be a deeper shift in investor sentiment as a result of the war in Ukraine and concerns about the impact of inflation on other types of assets.

Goldman Sachs last week raised its gold price forecast to $ 2,500 over the next six months, compared to $ 2,050 earlier. Goldman said it expects to see an increase in demand for gold this year from ETF investors, consumers in Asia and central banks.

Moscow is set to purchase all of Russia’s gold output this year after the Kremlin blocked access to all foreign exchange reserves held in foreign centers. This sanction on Russia may encourage other central banks and governments to reconsider the place gold holds in their foreign exchange reserves.

“The world’s central banks have both strong diversity and geopolitical reasons to change [more] Gold reserves, “said Mikhail Sprogis, an analyst at Goldman. Chris Flood

Will US and UK central banks raise interest rates despite the threat to growth? Source link Will US and UK central banks raise interest rates despite the threat to growth?

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