Global interest rates have risen at their quickest pace since the early 1990s as a result of persistent inflationary pressures, with central banks raising policy rates from the year’s lows to more restrictive levels.
Since Russia’s invasion of Ukraine, demand has increased and supply chain disruptions have exacerbated. Central banks will hike their interest rates to battle inflation. A commercial bank’s lending rate or deposit rate is set at this point. Small firms and individuals lose buying power as a result of the increased interest rates that commercial banks pass on to them. The cost of borrowing money to buy a home or a vehicle, for example, increases as a result.
In an unexpected move, the US Federal Reserve this week raised interest rates by 75 basis points, bringing the Fed funds target rate to a new high of 1.75 percent. Following a 40-year high in US CPI inflation in May, the Fed made its most aggressive single move since 1994. Central banks in other wealthy countries have followed suit. In this article, we’ll provide you with information on how inflation rates around the world increased and how traders can take advantage of it.
Increasing interest rates and inflation
FactSet data reveals that at least 45 nations have raised interest rates so far in 2022, with more expected in the near future. A key instrument in the battle against increasing prices is raising interest rates. This increases the cost of borrowing money, which has a negative impact on both consumer demand and company development. Consumers may see slower wage growth and businesses may have less pricing flexibility as a result.
The increasing rate of inflation and interest has a significant effect on the financial markets, as well. An example of this is the Forex market. Nowadays many investors search for the Forex brokers per country, in order to choose the best fit for them. Based on countries, brokers have different services and offers for their clients. In order to attract more customers, they try to furnish their customers with as many beneficial services and promotions as possible.
For the most part, the rate rises were driven by the Federal Reserve Bank of New York (Fed). During the June 2022 meeting, it voted to hike its policy rate by 1.5 percentage points. The head of the Federal Reserve, Jerome Powell, said that the committee would want to “do a bit more front-end loading” in order to get policy rates back to normal. Amid the greatest inflation rate in 40 years, the United States has taken measures to combat it.
Both the Swiss National Bank and the Bank of England boosted their policy rates by 50 and 25 basis points, respectively, to minus 0.25 percent.
EU inflation has risen to 8.1%, yet the ECB has yet to hike its policy rate. The European Central Bank, on the other hand, has issued very specific guidelines going forward. It planned to hike interest rates by 0.25 percent in July, maybe more in September, and then gradually increase them for the rest of this year. Unambiguous counsel is meant to assist consumers and investors in making budgetary and investment choices while minimizing the risk of unpleasant shocks that might destabilize markets.
The Federal Reserve is expected to raise interest rates at a quick pace this year. There are growing expectations that the European Central Bank (ECB) will begin raising interest rates for the first time since 2007 in an effort to slow the economy.
How can traders take advantage of the current situation?
When it comes to increasing interest and inflation rates, there are several ways traders can benefit from. One of the main ways, among others, in the case of Forex trading, is to buy a major currency that at a certain moment performs badly. For example, nowadays forex traders can invest their money in Euro or USD, as these two currencies have significantly decreased in value. Buying these major currencies with the hope of holding them and after recovering, selling them at higher prices can get investors benefits. In addition to that, Forex traders can start swing trading, which is quite profitable at the time of price fluctuation. As the situation in the Forex market is unstable and prices change a lot in a very short period of time, traders are allowed to get more benefits with the help of price level changes.
In the case of the stock market, as the inflation rate affects a lot of the assets, investors can buy, leading company stocks that are decreased in price comparatively. After holding a stock, when inflation and interest rates return to normal levels, traders can see profits.