Interest rates’ festival

The festival of central bank decisions continues. It was kicked off with Wednesday's Fed interest rate decision and the release of the latest FOMC projections. This was followed by a decision by the Bank of Japan, followed by a currency intervention. This coincided with the decision of the Bank of Switzerland and the Bank of Norway. The situation in the foreign exchange market now seems to be very dynamic.

The Bank of England will join the festival of central bank decisions today: a decision to raise the main interest rate by 50 bps from 1.75 to 2.25% may be expected. This still seems to be the end of the pound's interest rate hike. From the point of view of market interest rates and expectations for future interest rates, the Bank of England rate could rise in the region of 4.5-5.0% in future quarters. The British pound, although trying to bounce back before noon, is still at its weakest against the USD since the 1980s. The GBP/USD exchange rate as of 10:50 GMT+3 is at 1.1327.

Meantime, the Swiss National Bank (SNB) announced Thursday that it is raising its interest rate by 75 basis points, to 0.5%, from a negative -0.25%. The release said the SNB could not rule out further rate hikes in the future and that it will be "active in the foreign exchange market if necessary" to ensure adequate monetary conditions. According to the BBN website, inflation in Switzerland rose to 3.5% in August, with forecasts for 2022 averaging 3%, for 2023 2.4% and for 2024 1.7%. GDP growth in 2022 is expected to be around 2%, although forecasts remain uncertain. "The biggest risks are the global economic slowdown, a worsening gas shortage in Europe and an electricity shortage in Switzerland. In addition, a recurrence of the coronavirus pandemic cannot be ruled out." - The SNB statement added. However, looking at the behaviour of the Swiss franc after the SNB decision, it seems that the market expected more. The EUR/CHF pair rate rose sharply.

According to a note published by a Bloomberg commentator, today's decline in the franc may be short-lived, while the SNB prioritizes the fight against inflation. A stronger franc reduces the impact of imported inflation. However, the strength of the franc should soon begin to have a subdued effect on inflation, according to the published note.

Arranging everything chronologically, one would start with the Fed decision, where it was once again decided to raise the range for the federal funds rate by 75 bps, to 3.00-3.25%. Along with the decision, the FOMC's macroeconomic projections were also published. Committee members indicate the possibility of a peak in interest rate hikes in 2023. The peak could fall in the region of 4.5-4.75%. Such high-interest rates are expected to skillfully suppress inflation but could also, on occasion, affect the slowdown in the economy and the unemployment rate. Jerome Powell said yesterday that lower growth and higher unemployment is still an overall lowered price to pay for slowing inflation than it would be if it got out of control. According to the Fed, in 2022. GDP is expected to grow by only 0.2%, and by 1.7% in 2023. Inflation is expected to be 5.4 and 2.8% in those years, respectively, and unemployment is expected to rise from 3.8 to 4.4%, according to the Fed's projections.

After the Fed's decision, it was time for the Bank of Japan's decision. This one did not decide to change the parameters of monetary policy but mentioned possible currency intervention. The yen weakened earlier against the USD to levels not seen since 1998, exceeding JPY 145 per USD. The Japanese finally intervened on the yen today after 10:00 GMT+3 a.m. The USD/JPY exchange rate fell from around 145.80 to 142.20 in less than an hour. According to Bloomberg, this was the first direct currency intervention on the yen since 1998. "The Japanese government intervened in the foreign exchange market to support the yen," - Masato Kanda, deputy finance minister for international affairs, said. He spoke to reporters after the yen rose sharply against the dollar, erasing most of the decline following the Bank of Japan's decision to maintain the ultra-loose monetary policy. Kanda added that Japan had taken "bold action" in the market.

For the first time since 1998, the Japanese government decided to intervene in the FX market. For a few weeks, there were speculations about that possibility, and it came true after the Fed and BoJ decisions. The Fed raised rates by 0,75 pp and signalled more hikes in time to come, and the BoJ maintained its monetary policy. In the morning hours, the USD/JPY pair almost reached 146,00 JPY level, and then intervention came. In less than an hour, the pair tumbled about 500 pips near 140,00 JPY, the lowest level since the beginning of the month. This was tremendous volatility in relation to previous movements.

What could be the JPY's future? It seems for now that the Japanese government would like to buy some time and is waiting for the dollar to lose ground. Without changing monetary policy by the Bank of Japan, it could be hard to stop the previous dollar rally.