Finanze® Daily Digest - 22/09/2022

The Brief: European Central Bank (ECB) president Christine Lagarde announced that interest rates need to increase at a fast pace to get inflation contained at 2%. This comes after the ECB raised its rate at 75 basis points instead of the usual 25 basis-point hike earlier in the month. At 12 pm today, Bank of England (BOE) governor Andrew Bailey will be announcing the expected benchmark lending rate increase and the BOE’s plan to sell more bonds.

Why It Matters: Interest rate hikes are used to suppress inflation but if it is too aggressive, it may result in severe recession as warned by the World Bank. US rate hikes also raise the cost of its exports due to a stronger dollar and a more aggressive Federal Reserve stance. Furthermore, other central banks tend to mirror the Fed’s move, which is what the World Bank is cautioning against.

Finanze® Foresights: As mentioned in our previous posts, we’re expecting a hike of about half percentage point by the BOE, however, this could be higher if the central bank’s board, composed mostly of hawkish members, heeds a faster pace of monetary tightening. Truss and the BOE need a soft landing given their fiscal and monetary policies working together. But this could prove to be difficult since the effects of these market interventions come with painful consequences.

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