Interest rates rise around the world

Federal reserve

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.