Central banks around the world continue to raise interest rates to multi-year highs as inflation runs rampant and the dollar exerts its dominance against other currencies.

The Federal Reserve last night raised rates by another .75 percentage points, taking the rate range to 3% and 3.25%. This is the highest US interest rates have been in 15 years, and the Fed was clear that rates would need to go higher, despite risking a recession for the US economy. Chairman Jerome Powell said of the risks; ‘No one knows whether this process will lead to a recession or if so, how significant that recession would be.’

220922 US Rate Chart

Other central banks have been following suit today, with Switzerland moving out of negative interest rates for the first time in eight years, to a new rate of 0.5%. Norway also increased rates to 2.25% today, and signalled further rises in November.

In September the European Central Bank hiked interest rates by a record 0.75 points to 0.75%. This of course leaves the EU far behind the likes of the Fed and BoE, and leaves their economy in a precarious position approaching a winter of high inflation.

The Bank of England disappointed markets today with a 0.5 percentage point hike. Despite taking UK interest rates to 2.25%, the highest in 14 years, the rise is lower than expected considering the high inflation facing the UK, and the weakness of the pound versus the dollar. The vote also showed a significant split in the Bank’s committee. The 5 – 3 – 1 split between the members voting does little to inspire images of a cohesive group with a solid plan for the future.

Sterling fell to a 37-year low against the dollar this morning of $1.12231. Despite recovering some ground this morning, GBP remains very weak at $1.13. The Bank’s forecasts for the UK economy also made for bleak reading. Although the government’s energy price cap will help artificially keep inflation figures down in the near-term, the money saved for consumers and businesses will help feed into medium and longer-term inflation in the months ahead. The bank forecasts that inflation will now hit roughly 11% by October - down from an initial forecast of 13% - but will remain in double digits for several months.

The BoE also warned that the UK is likely already in recession. Following the 0.1% contraction in Q2, Q3 is also expected to fall by 0.1%, resulting in the two consecutive quarters needed for a technical recession. With people’s finances already being squeezed, Q4 is also unlikely to see any reversal of this trend, making 2022 a gloomy year for the UK economy despite the end of pandemic restrictions.

The strength of the dollar has been weighing on other currencies as well, with the euro back below parity thanks to its weak outlook. The Japanese yen has also been suffering a currency crisis of late, prompting their government to intervene today for the first time since 1998. The strength of the dollar has been a significant headwind for commodities like gold this year, with gold down almost 13% in the past six months in USD.

The resulting weakness in other currencies however has kept the gold price up domestically for many other countries; with gold up 1.98% in GBP, and down just 2% in Euros over the same six-month period. Investors should expect further currency volatility for the remainder of the year, and this is coupled with any weakening in the dollar there could be significant gains to be made for gold.