GLOBAL MARKETS-Stocks fall as central banks wage war on inflation with rate hikes

(Updates to add Bank of England decision, refreshes prices)

By Amanda Cooper

LONDON, Dec 15 (Reuters) – Shares fell globally on Thursday after major central banks began to deliver their final policy decisions of the year, with the U.S. Federal Reserve signalling that it expected interest rates to stay higher for longer.

In Europe, the Bank of England struck a far more dovish note after delivering its ninth straight rate rise – and the eighth of 2022 – saying it believes more increases will be necessary, even though it thinks UK inflation has peaked.

The pound initially slid by more than 1% against the dollar after the BoE’s Monetary Policy Committee voted 6-3 in favour of the half-point rise to 3.50%, highlighting the split among policymakers over how to tackle double-digit inflation, wage growth and a slowing economy.

“The extent of the divisions across the committee is an eye-opener,” said Philip Shaw, chief economist at Investec.

“While it is normal to see policymakers disagree towards the end of a rate cycle, the split makes it more difficult to predict the extent to which interest rates will rise,” Shaw said.

Earlier in the day, the Swiss National Bank delivered an expected half-point hike that brought rates to a 14-year high of 1%, while the Norwegian central bank raised rates by a quarter-point to 2.75% and indicated it has not finished tightening monetary policy.

The MSCI All-World index was last down 0.5%, set for a second straight day of declines, after losses on Wall Street the previous day drove the S&P 500 down 0.6%.

Global stocks have risen by nearly 13% this quarter, marking their strongest quarterly performance for two years, based on the assumption that U.S. inflation is subsiding and soon the Fed will indicate it no longer needs to rapidly raise rates.

“Each time we get cooling inflation data and then the market gets really ahead of itself thinking ‘this is going to be the moment that the Fed is going to go dovish’ and then they’re disappointed,” CityIndex strategist Fiona Cincotta said.

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“It seems to be a recurring pattern and I would imagine one that’s going to continue as we go through Q1 of 2023 as well, so it’s a combination of a market getting ahead of itself and some profit taking, but I don’t think it’s necessarily the start of an ominous downward trend,” she said.

Fed Chair Jerome Powell said on Wednesday the central bank would deliver more rate hikes next year even as the economy slips towards a recession, arguing that a higher cost would be paid if the Fed does not get a firmer grip on inflation.

The comments followed the Fed’s decision to raise the benchmark rate by half a percentage point – as expected but down from the recent 75 basis point increases – but also projected a terminal rate above 5%, a level not seen since 2007.

The dollar, which has lost almost 7% in value in the fourth quarter, rose 0.61%, steering clear of this week’s six-month lows despite a dip in Treasury yields that would normally depress the currency.

U.S. 10-year yields eased 4 bps to 3.465%, while those on two-year notes fell 3 bps to 4.22%, leaving the gap between the two, or “curve”, at around -75 bps.

This inversion reflects concern among investors that higher interest rates could tilt the economy into recession.

Next up is the European Central Bank, which is also expected to raise euro zone rates by half a point on Thursday and give some indication about its plans to tighten monetary policy further by selling off some of its holdings of government bonds.

In Europe, equities tumbled and bond yields rose. The STOXX fell by 1.1% as heavyweight stocks across sectors sank.

U.S. e-Mini futures slid between 1-1.2%, suggesting a drop at Thursday’s opening bell.

The euro fell 0.6% to $1.062, but was still near Wednesday’s more than six-month peak at $1.0695.

Sterling was last down 0.9% at $1.2314, still close to six-month highs.

Crude oil gave back some of Wednesday’s 2.5% rally that was driven by forecasts of a rebound in energy demand next year on the back of China reopening after COVID lockdowns.

China’s economy, however, lost more steam in November as factory output slowed and retail sales fell again, hobbled by surging COVID-19 infections and widespread curbs on movement.

Brent crude futures were flat around $82.70 a barrel after closing Wednesday’s session up $2.02.

(Additional reporting by Lucy Raitano in London and Kevin Buckland in Tokyo; Editing by Simon Cameron-Moore, Arun Koyyur and Susan Fenton)