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AFP

World

Stock markets sink, dollar jumps

Stock Market US Federal Reserve Jerome Powell United States Interest Rates Inflation Patrick OHare Bank of England London Recession

The dollar jumped after the US Federal Reserve indicated interest rates needed to go higher and for a longer period. ©AFP

London (AFP) - Stock markets around the world sank Thursday while the dollar rallied after the Federal Reserve warned US interest rates would go higher than previously expected in its fight against decades-high inflation.

Meanwhile the Bank of England warned that Britain faced a recession set to last until mid-2024.

The Fed on Wednesday unveiled a fourth straight 0.75-percentage-point increase as expected -- the sixth hike this year to cool rampant prices.

The dollar rose strongly against the pound despite the Bank of England also delivering on Thursday a 0.75-percentage-point hike -- the largest in 33 years -- to 3.0 percent, or the highest rate since 2008.

The pound fell by two percent against the dollar in afternoon trading before clawing back some of its losses, which helped London's FTSE 100 share index buck the trend and rise 0.6 percent.The index is loaded with multinationals which earn most of their revenues in dollars and post higher profits in pounds when the sterling exchange rate is low.

European Central Bank president Christine Lagarde flagged more interest rate hikes on Thursday with comments that a "mild" eurozone recession was looming but would not be enough to bring down record-high inflation.

Oil prices also fell heavily on Thursday as aggressive rate hikes increase expectations of a global recession and softer demand for energy.

Hong Kong led stock market losses as the city's central bank hiked rates in line with the Fed, owing to their policy link via the dollar peg.

Traders gave back a chunk of the previous two days' gains, which came on the back of speculation China was planning to roll back some of its painful zero-Covid policies.

Adding to the selling was confirmation from Beijing's health authority that it intended to stick to the strategy.

'Some ways to go'

"Stocks fell...after the Federal Reserve raised benchmark interest rates and warned that there was still some ways to go in its efforts to tame inflation," said Mark Haefele, chief investment officer at UBS Global Wealth Management.

Before the Fed announcement, stocks had rallied for more than a week on speculation the US central bank would indicate that its rate tightening could soon reach a peak as the world's biggest economy showed signs of slowing.

Yet Fed chief Jerome Powell poured cold water on hopes for a "pivot" in policy, telling a news conference "incoming data since our last meeting suggests that ultimate level of interest rates will be higher than previously expected".

Briefing.com analyst Patrick O'Hare said for investors "the point that registered was (Powell's) view that it is very premature to talk about pausing the rate hikes".

Another key point was that "the Fed still has a ways to go to get the policy rate to a restrictive level that is sufficient for getting inflation back down to the 2.0 percent target," O'Hare noted.

Moreover, Powell indicated "that the Fed's terminal rate is apt to be higher than previously expected and is likely to be held there longer than previously expected," which upended previous market expectations.

Investors now expect Fed rates to top out at more than five percent, compared with four percent previously.

The latest US data didn't help sentiment, with a key survey showing the services sector grew less than expected in October as new orders eased and businesses struggled to replenish their stocks.

Global equities have slumped this year on mounting fears that rising borrowing costs will curtail consumer and business spending, sparking a global recession.