Fed raises rates by 50 bp
Markets were choppy during May as investors’ ongoing preoccupation over inflation was compounded by a raft of interest rate increases. The US Federal Reserve (Fed) raised its key interest rate by 50 basis points during May to a range of 0.75% to 1%. Fed officials are set to implement further tightening measures during 2022, with the federal funds rate forecast to reach almost 2% by the end of the year.
US inflation remains at a four-decade high
Inflationary pressures moderated slightly in the US during April: the rate of consumer price inflation eased from 8.5% year on year in March to 8.3% as petrol price rises eased. Nevertheless, it remained at a four-decade high, underpinned by rising prices for housing, food and travel. The Dow Jones Industrial Average Index ended May largely unchanged, while the yield on the US 10-year Treasury bond rose above 3% for the first time in over three years during the month.
Inflation grips Europe
Europe’s annualised rate of inflation surged from 7.4% in April to a fresh all-time high of 8.1% during May, driven up by energy prices. Some countries in the euro area – including Estonia, Lithuania, Latvia and Greece – are experiencing double-digit annual inflation rates, whereas inflationary pressures in countries such as Malta and France are comparatively muted at 5.6% and 5.8% respectively. The European Central Bank (ECB), however, believes that inflation in the eurozone is set to be “on target over the medium term”. The Dax Index rose by 2.1% during May.
ECB tightening in sight
Amid heightened expectations of monetary tightening in Europe, the yield on Germany’s benchmark goverment bond breached 1% during May. ECB President Christine Lagarde commented: “We are likely to be in a position to exit negative interest rates by the end of the third quarter”.
Rates rising in Asia
The Reserve Bank of India increased its benchmark rate by 40 basis points to 4.4% in a bid to curb inflationary pressures, and the Reserve Bank of Australia raised its key interest rate by 25 basis points to 0.35% during the month – its first rate increase in over a decade. Elsewhere, Japan’s economy contracted by 1% year on year during the first three months of 2022. The Nikkei 225 Index climbed by 1.6% over May.