Money market turmoil as inflation wreaks havoc globally: Bank of Japan moves to push yen down against dollar in a big way
Financial markets jumped wildly yesterday as central banks around the world struggled to find a way through rising inflation and a massive dollar.
Interest rates were hiked from London and Washington to Zurich and Stockholm to curb rising prices – the dollar rallied on US aggression.
This prompted a rare intervention in currency markets by the Bank of Japan yesterday – the first since 1998 – when it stepped in to buy the ailing yen.
Crisis: The Japanese central bank bought the ailing yen after the US Federal Reserve raised interest rates by three quarters of a percentage point for the third time in a row.
The move came after the Federal Reserve hiked interest rates by three-quarters percent for the third consecutive week and hinted there was more to come.
Hours later, the Bank of Japan left interest rates below zero and the yen fell to a 24-year low against the dollar.
This prompted Japan to shore up its currency by using its dollar reserves to buy the yen, causing the croaking currency to rise more than 2 percent.
Prime Minister Fumio Kishida said the government would take “decisive steps in response to extreme volatility,” but experts cast doubt on the strategy.
It was just the latest example of the pressure the dollar run is putting on the financial world.
The yen is down 19 percent against the dollar this year, while the pound is down 17 percent and the euro is down 13 percent.
Yesterday sterling was back on track – already near a 37-year low. It slipped below $1.13 after the Bank of England hiked interest rates by 0.5 percent. Meanwhile, UK bonds suffered their biggest sell-off since March 2020.
Declining demand for bonds – packages of government debt – increases investors’ desire for yield and makes public sector borrowing more expensive.
Bank of England split over rate hike
by Lucy White
A deep rift has opened up at the Bank of England over the best way to combat red-hot inflation.
The nine-member Monetary Policy Committee (MPC) split into three when officials disagreed on how much interest rates should rise.
Five policymakers, including Governor Andrew Bailey, opted for a 0.5 percent hike, raising interest rates to 2.25 percent.
Deep Divide: MPC members Katherine Mann (right) and Swati Dhingra (left)
Three, including Katherine Mann, supported the move to a more aggressive 0.75 percentage point. And new member Swati Dhingra voted for a 0.25 percentage point increase.
In a bid to control inflation, the bank has been raising interest rates at an unprecedented pace since December.
But it was criticized for not doing enough as inflation hit a 40-year high of 10.1 percent in July and 9.9 percent in August.
The bank was expected to rise 0.75 percentage point over several quarters this month after big hikes by the US Federal Reserve and European Central Bank.
Former MPC member Andrew Sentens said the committee postponed the 0.75 increase and chose a softer option instead.
“The official interest rate of 2.25 percent will not dampen UK inflation when it is around 10 percent. It’s a shame the MPC doesn’t understand this fundamental fact.
Julian Jessop, an economist at the Institute of Economic Affairs think-tank, said it “missed another opportunity to gain credibility”.
He said the bank plans to reverse its massive pandemic-era money-printing program by selling some government bonds.
MPC said it will sell back investors worth £80bn over the next 12 months, bringing the total on its books to £758bn.
Equity markets also endured a volatile session, with London’s FTSE 100 rising sharply to close 1.1 percent lower. Paris and Frankfurt fell by almost 2 percent. A super strong dollar creates severe imbalances for the global economy.
Dollar-denominated commodities such as oil are becoming more expensive and countries with dollar debt are having difficulty servicing them.
But intervening in markets is controversial, and US Treasury Secretary Janet Yellen said earlier this year that it was only necessary in “rare and exceptional circumstances”.
Analysts at Deutsche Bank were skeptical of Japan’s strategy, saying the reserves it needs “could get very expensive very quickly.”
In Britain, the Bank of England infamously intervened to protect the pound during the 1992 sale of an ugly currency.
Seven years ago there was coordinated action to weaken the super strong dollar. There was no talk of repeating this agreement, known as the Plaza Agreement.
Jane Foley, head of FX strategy at Rabobank, said such an agreement is unlikely until the Fed is confident inflation is under control. “However, whether we need one or not is another question entirely,” he said.
Share or comment on this article: