The Bank of Japan headquarters in Tokyo. Image Credit: Bloomberg

Frankfurt / Washington: Global central banks continued raising interest rates on Thursday, following the US Federal Reserve in a fight against inflation that is sending shockwaves through financial markets and the economy.

Japan, the outlier among major developed economies, kept interest rates steady on Thursday only to be punished as traders pushed the yen to a record low against the dollar, prompting the first intervention by Japanese authorities to support the currency since 1998.

It was a potential sign of a massive adjustment to come as the world adapts to US interest rates rising to levels not seen since the global financial crisis 15 years ago prompted the Fed to slash its policy rate to zero and unleash massive rounds of bond-buying.

End of an era

That era of cheap liquidity, which lasted through the worst of the coronavirus pandemic and until inflation became a prominent risk, is now ending. US interest rates and the US dollar serve as reference points for borrowing costs around the world, and Federal Reserve officials have now flagged not just plans to continue tightening monetary policy, but to keep it tight for years to come in what may for many countries amount to a fresh financial shock, and a broad repricing of bonds, stocks, and other financial instruments.

The value of the dollar is soaring, helping ease inflation in the United States even as it raises the costs of many dollar-priced imports for other countries, a factor that may have figured into Japan's intervention.

Some analysts feel more is bound to follow.

Inflation shock

"Intervening in markets tends to result in...less optimal economic outcomes than would otherwise result," RSM Chief Economist Joe Brusuelas wrote after Japan's action. "But the current inflation shock may outweigh this reluctance. We may be entering an era of intervention in foreign exchange markets."

In the aftermath of the 2007 to 2009 financial crisis, central bankers often accused each other of waging currency wars to cheapen local money to promote exports, an accusation levelled pointedly at the Fed. Inflation may now prompt a similar tension in the other direction.

U.S. Treasury officials, who monitor global currency policies closely for signs countries are intervening to gain an advantage, took note of Japan's move on Thursday as an effort to "reduce recent heightened volatility" in the yen, but stopped short of endorsing it.

U.S. Treasury Secretary Janet Yellen, asked in July about the yen's substantial depreciation, said currency intervention was warranted only in "rare and exceptional circumstances." Though many countries are battling a common inflation outbreak in the aftermath of the COVID-19 pandemic, the Fed's response has stood out both because of the dollar's global role and the aggressiveness of the U.S. central bank.


Fed Chair Jerome Powell, asked about the risks of major central banks shifting monetary policy in unison, said that while the Fed tries to estimate the impact of policy "spillovers" between countries, he and his colleagues had to remain focused on local economic conditions.

"We are very aware of what's going on in other economies around the world and what that means for us and vice versa," Powell said at his press conference on Wednesday after the Fed approved its third consecutive "unusually large" 75 basis point rate increase. But, he said, U.S. officials "have a domestic mandate, domestic objectives" of stable U.S. inflation and maximum employment.

Chorus of rate hikes

The actions by the Fed, along with those of other major central banks, have formed the backdrop for early warnings from international officials and analysts that rising rates for currencies like the dollar and the euro could tighten global financial conditions so much it leads to a global recession.

Along with the Fed's action on Wednesday, its fifth interest rate increase since March, a half dozen central banks from Indonesia to Norway followed suit with their own rate increases and often with guidance that more would follow.

They are fighting inflation rates ranging from Switzerland's 3.5% to nearly 10% in Britain - the result of a rebound in demand since the pandemic subsided accompanied by sluggish supply, especially from China, and rising prices for fuel and other commodities in the wake of Russia's invasion of Ukraine.

Central bankers were adamant that curbing runaway price growth was their main task at present. But they were bracing for their actions to take a toll, as rising borrowing costs typically dampen investment, hiring and consumption.

"We have got to get inflation behind us," Powell told reporters after Fed policymakers unanimously agreed to raise the central bank's benchmark overnight interest rate to a range of 3.00%-3.25%. "I wish there were a painless way to do that. There isn't."

The Fed said it expected the economy to slow to a crawl and unemployment to rise to a degree historically associated with a recession - a prospect looming ever larger in the euro zone too and seen as highly likely in Britain.

England, Turkey, South Africa, Philippines

The Bank of England raised rates and said it would continue to "respond forcefully, as necessary" to inflation, despite the economy entering recession. "For borrowers, this will mean significantly higher costs yet again and yet still no real control on the soaring cost of living," Emma-Lou Montgomery, an associate director at Fidelity International said.

Meanwhile, Turkey's central bank continued with its unorthodox policy on Thursday by delivering another surprise interest rate cut despite inflation running at more than 80%, sending the lira to an all-time low against the dollar.

South Africa's central bank on Thursday raised its benchmark interest rate by a hefty 0.75 percentage points again as it battles to control inflation. The South African central bank's decision mirrors a similar 0.75-point hike in July that was the highest in a decade, brings the rate to 6.25 percent, close to its pre-Covid pandemic level.

On Thursday, the Philippine central bank raised its policy rate for a fifth time this year to quell inflation pressures amid a slumping currency and a hawkish Federal Reserve. Bangko Sentral ng Pilipinas raised the overnight reverse repurchase rate by 50 basis points to 4.25%, it most analysts predicted.