In an effort to tackle rising inflation, the central banks of Switzerland and the United Kingdom followed the example of the U.S. Federal Reserve and raised interest rates, or borrowing costs, after which global stocks fell sharply this week, marking the sixth consecutive day of decline. Additionally, this has increased the risk of recession, especially in the U.S.
According to the Financial Times, the Swiss National Bank surprised on Thursday with its move to raise interest rates, the first since the beginning of the global financial crisis in 2007, by half a percentage point, after inflation in Switzerland reached its highest level in 14 years last month.
The Bank of England joined this trend a few hours later, with an increase of 0.25 percentage points, as it warned that inflation in the United Kingdom would rise above 11 percent this year.
The day before, the U.S. Federal Reserve Fed raised interest rates by 0.75 percentage points, the largest increase since 1994. This is the third Fed rate hike this year, following a 0.25 percentage point increase in March and a 0.5 percentage point increase in May. Interest rates now range from 1.5 to 1.75 percent, the highest level since March 2020.
As they suppress consumption, rising interest rates can harm both stocks and economic growth, which has begun to occur on global exchanges. Since the end of last week, the FTSE 100 index on the London Stock Exchange has fallen by 5.5 percent, the largest drop since the crisis caused by the coronavirus pandemic in March 2020, while the S&P 500 index on the New York Stock Exchange also fell by 3.3 percent on Thursday. The Nasdaq index dropped by 4.08 percent.
Increased Chances of Recession
On the Tokyo Stock Exchange, the Topix index also fell by 1.7 percent on Friday, as did the Nikkei, while the Chinese CSI 300 rose by 1.4 percent. Stock prices in Shanghai, South Korea, and Australia recorded declines ranging from 0.1 to 1.8 percent.
If two consecutive quarters of negative economic growth are recorded, it will mean entering a recession. Hina reports that further interest rate increases are expected in the U.S., with Fed officials estimating that by the end of the year, rates could reach 3.4 percent, the highest since the economic crisis of 2008. They believe that despite the sharp increase in rates, a recession will be avoided. However, they have significantly reduced their economic growth estimates for this year, from 2.8 to 1.7 percent.
Mike Wilson, chief strategist at Morgan Stanley, told CNBC that the Fed’s interest rate hike only increases the chances of a recession, as 0.75 percentage points 'will not provide an immediate payoff' nor will it tame inflation of 8.6 percent, the highest the U.S. has faced in the last four decades.
Wilson, who accurately predicted the last three market crashes, also predicts that the S&P 500 could fall another 10 percent. A similar decline is expected for the Nasdaq 100 technology stock market, Wilson believes, as the technology sector has a higher risk of demand return than other sectors, reports Business Insider.
However, other economic experts, including analysts from Wells Fargo, fear that the U.S. could enter a recession by early 2023. Not only because it is the only way to bring inflation under control, but primarily due to the forecast that unemployment will rise by 0.5 percent by the end of 2024, which certainly indicates a recession.
