Central Banks Unite Against Inflation: Rate Hikes Loom Globally

Central banks across developed economies are expected to raise their policy rates in unison to counter inflation and an energy shock. This coordinated effort is a departure from previous joint actions during recessions or when inflation took hold.

Inflation rates have risen substantially, with the U.S. and UK at 3.4%, Canada at 3.0%, Australia at 3.2%, New Zealand at 4.1%, Germany at 2.9%, France at 2.6%, Spain at 4.6%, and Italy's inflation reaching 3.2% after the energy shock.

Short-term yields are also rising as a result of these inflation concerns, which are significantly higher than the central banks' 2% targets. This is causing hardship for consumers and could lead to a recession, while reducing expected returns on investments and slowing growth in the financial markets.

The overnight index swap (OIS) market expects at least one rate hike by the end of the year, with additional hikes anticipated across developed economies next year. The 2-year bond yield is also indicating an expectation of further rate increases over the next two years.