Central banks act to reduce inflation

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers week ending 18 March 2022.

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Hopes that an agreement between Russia and Ukraine could bring an end to the fighting rose early in the week, before being dashed as it progressed. The human tragedy in Eastern Europe continues, although some progress appears to have been made after Ukraine conceded that it will not join NATO and Russia has withdrawn its demand for a change of government in Kyiv.

It appears Russia has avoided a sovereign debt default. Russia’s Ministry of Finance has said it transferred a $117m bond interest payment, which means the country appears to have avoided its first external bond default in a century. The payments, which were due on Wednesday but with a 30-day grace period, are seen as the first test of whether Moscow will meet its international debt obligations following the invasion of Ukraine. China did not alter its position as it continued to be an ally to Moscow.

Central banks in the US and UK moved to try and deal with elevated inflation, which continues to be boosted by high commodity prices resulting from the supply disruption caused by the war and consequent sanctions against Russia.

The blue-chip FTSE 100 index was up 2.6% over the week by mid-session on Friday, with the more UK-focused FTSE 250 up 4.1%.

Central banks

As expected, the US Federal Reserve raised interest rates for the first time since 2018. The US central bank said it was lifting its benchmark rate by 0.25 percentage points and signalled plans for further rate rises in the months ahead. Inflation in the US hit a 40-year high of 7.9% last month and the accompanying comments were relatively hawkish. “The plan is to restore price stability while also maintaining a strong labour market," Federal Reserve Chairman Jerome Powell said. "That is our intention, and we believe we can do that, but we have to restore price stability. We're not going to let high inflation become entrenched," he said. Projections released after the Fed's meeting show officials also expect the interest rate to rise to almost 2% by the end of the year - a full percentage point higher than they predicted in December. There were no comments on when the central bank is going to start selling the assets it purchased to support the economy in the pandemic.

Central banks are continuing to struggle with the threat of stagflation.

UK interest rates were increased for the third time in four months.

UK interest rates were increased for the third time in four months as the Bank of England also attempts to dampen soaring inflation. The rise from 0.5% to 0.75% means rates are now at their highest level since March 2020, when Covid-19 lockdowns began.

The Bank of Japan maintained its massive stimulus programme and warned of heightening risks to a fragile economic recovery from the Ukraine crisis, reinforcing expectations it will remain an outlier in the global shift towards tighter monetary policy. Inflation remains subdued and Covid-19 lockdowns have continued to reduce economic activity.

Beijing announced more stimulus. China's Vice Premier Liu He said Beijing would roll out more measures to boost the Chinese economy as well as favourable policy steps for its capital markets. The gulf between authoritarian nations and Western-led democracies is growing wider, halting the 20th Century trend towards globalisation.


Oil prices dipped mid-week as hopes of a diplomatic settlement in Ukraine mounted. The chances of a peace accord seen waned during the latter part of the week, however, and the price soared on Thursday and Friday. As a result, prices were approaching $110 on Friday, little changed over the week.

Saudi Arabia, which sells a quarter of its exports to China, is considering making these sales in yuan, the Wall Street Journal reported. The petrodollar is a significant foundation of US dollar hegemony and some oil producers have wanted to use currencies for some time. However, Saudi Arabia pegs the riyal to the dollar, so any damage inadvertently dealt to the US currency will hurt its own.


As a market driver, the pandemic has taken a backseat to the war in Ukraine for a few weeks, but the situation in China has reignited concerns about global supply chains, particularly in the technology sector. Lockdowns under its draconian “zero-Covid” policy have hit regions key regions including Shenzhen, where all but essential factories in the technology manufacturing hub were instructed to stop production for a week. The government is unlikely to withdraw this policy until Beijing has developed its own effective mRNA vaccine. Apple supplier Foxconn said its revenue may be up to 3% lower this year and it might struggle to raise its operating profit margin as component costs rise. However, Foxconn’s main iPhone production site is not affected at this time. There are concerns that the lockdown’s effect on the Yantian port – the fourth largest in the world – will cause further shipping delays globally.

After more than a month of decline, Covid-19 cases globally started to increase last week.

Indeed, after more than a month of decline, Covid-19 cases globally started to increase last week, the World Health Organisation (WHO) said. A combination of factors was causing the increases, including the highly transmissible Omicron variant and its BA.2 sublineage, and the lifting of public health and social measures, the WHO said.

Germany recorded its highest rate of Covid-19 infections since the start of the pandemic, although the rate of people dying of the virus is considerably lower than during the 2020-21 winter wave. Despite the high number of infections, mask-wearing mandates in shops, restaurants and schools will come to an end in many parts of the country this weekend.


Russia is becoming more digitally isolated, as it tries to control the flow of information about the war to ordinary Russians. In 2019, Moscow passed the Sovereign Internet Law, which mandated the redirection of online traffic through Russian servers – allowing the Putin regime to censor and monitor internet traffic. On Monday, Russia’s deputy digital minister Andrei Chemenko directed government agencies to switch to domain name system (DNS) to servers that are within Russia’s borders by Friday. After the instruction was widely publicised, the Kremlin denied that it planned to cut off the Russian internet completely from the rest of the world, although a spokesman did not deny that Moscow planned to isolate the government’s own websites. In 2019, Russia said it had successfully tested a country-wide alternative to the global internet, which has become known as RuNet.

Western technology companies have also been withdrawing from Russia. These included US internet service providers Cogent, one of the largest Internet backbone providers in the world, and Lumen, one of the largest international data transport providers in Russia. This is likely to reduce the bandwidth available within RuNet. There have been calls for Russia to be cut off from the internet by the west. However, (ICANN), the non-profit organisation that maintains the global DNS, refused a Ukrainian request to cut off Russian websites in early March. Such a move would hit Russia hard economically but would cut off ordinary Russians from uncensored information and increase their digital isolation. Earlier this month in response to the restrictions on its website by Moscow, Twitter launched a privacy-protected version of its website. Known as an “onion” service, users can access this version of Twitter if they download the Tor browser, which allows people to access websites on the “dark web”. Instead of “.com”, onion sites have a “.onion” suffix.

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Central banks act to reduce inflation

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