Dhe signal from Stockholm worried investors on Tuesday: The Swedish central bank, the Riksbank, unexpectedly increased its key interest rate by 1.0 percentage point or 100 basis points to 1.75 percent. It is the largest rate hike in the past 30 years. The Riksbank cited the fight against inflation as the reason. She intends to stick with monetary tightening as long as consumer prices rise. At 9.0 percent, inflation in Sweden is currently at its highest level in three decades. The record increase in producer prices in August of 45.8 percent also caused concern in Germany. The European Central Bank (ECB) lead to an even sharper tightening course.
The American central bank has been on this for much longer Federal Reserve (Fed). Their monetary policy meeting began on Tuesday. It will announce its interest rate decision this Wednesday evening. A further interest rate hike of 75 basis points – it would be the third in a row of this magnitude – is almost taken for granted on the financial markets. Recently, there were isolated voices that considered 100 basis points to be possible. Then the US federal funds rate would rise from 2.25 to 2.50 percent to the range of 3.25 to 3.50 percent. However, the majority of economists expect interest rates to rise by another 75 basis points.
US inflation data for August had already worried investors last week. The inflation rate fell to 8.3 percent, less than expected. The core rate excluding food and energy prices even rose to 6.3 percent. The stubborn overshoot in August, reflected in last week's core CPI reading, means the Fed still has a lot of work to do, Paolo said Zanghieri, chief economist at Generali Investments, the asset manager of the Italian insurance group. He expects another rate hike of 75 basis points in September, but sees a significant risk that the Fed will become even bolder and hike rates by a full percentage point.
Joachim Fels, chief economist at asset manager Pimco, which specializes in bonds, expects the Fed to raise interest rates on Wednesday and possibly also in November and December. He sees a more than 50 percent chance that both the Bank of England and the ECB will take their next move at 75 basis points rather than 50.
There has been a sell-off on the bond markets in the past few days. The yield on the ten-year US government bond rose to 3.5375 percent, its highest level since 2011. The two-year yield is even higher at just under 4 percent. It was last this high in 2007. When short-term yields are higher than long-term yields, as in the US, the yield curve is inverted. This is seen as a recession signal on the financial markets.