Where next for interest-rates and bond yields?

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by Shaun Richards

Today I thought we should take stock on one of the changes of 2022 which is that we are beginning to see rises in interest-rates. If we look at the world’s main central bank the US Federal Reserve it made its first move on March 16th when it did this.

 In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent.

There is a perspective here in that in terms of time we are not even 3 months ( and one further rise of 0.5%) and we are already wondering about their resolve?! One example of the way that this is looked at in the media is this from the Financial Times

Central banks are raising rates rapidly in the most widespread tightening of monetary policy for more than two decades, according to a Financial Times analysis that lays bare the reversal of their previous historically loose stance.
Policymakers around the world have announced more than 60 increases in current key interest rates in the past three months, according to an FT analysis of central banking data — the largest number since at least the start of 2000.

The number of increases is not even a tenth of all the cuts and as language matters I would argue that we are seeing a reduction in stimulus rather than a tightening. Also two of the word’s major central banks have stood apart from the moves as the Bank of Japan has actively any rise in Japanese bond yields via its use of yield curve control bond purchases The ECB has so far only talked about increases later this summer and remains with a deposit rate of -0.5.

So we have a further counterpoint often reflected in bond yields ( which in theory are the sum of expected interest-rate increases/changes although in practice it is more complicated than that). So we find ourselves mulling the words of Diana Ross as we consider where interest-rates are goinf?

Do you know where you’re going to?
Do you like the things that life is showin’ you?
Where are you going to?
Do you know?
Do you get what you’re hopin’ for
When you look behind you, there’s no open doors
What are you hopin’ for?
Do you know?

Africa and Latin America

There is a geographical issue which was partly highlighted by poor Malawi on Friday. The 25% currency devaluation on Friday reminded us of this.

The Monetary Policy Committee (MPC), at its second meeting of 2022 held on 29th April, decided to raise the Policy rate by 200 basis points to 14.0 percent.

Whilst Malawi has currency problems its interest-rates are not that high for the region. Earlier in the week the Bank of Ghana announced this.

On the basis of the above assessment, the Committee decided to raise the policy rate by 200 basis points to 19.0 percent.

Even the other end of the African spectrum has much higher interest-rates than us in Europe as we look at the Reserve Bank of South Africa.

Against this backdrop, the MPC decided to increase the repurchase rate by 50 basis points to 4.75% per year, with effect from the 20 of May 2022.

If we switch to Latin America there is quite a swerve deserving of an article all of its own!

Emerging markets in Latin America embarked on tightening cycles last year, as their economies were damaged by the pandemic.

After all interest-rate cuts were supposed to “save” us in economic terms from damage from the pandemic. The interesting line that we have contributed to trouble elsewhere gets ignore though. We do however get some numbers and the move in Brazil is in many ways shocking.

 Brazil has raised rates 10 times in just over one year to 12.75 per cent, up from only 2 per cent in March last year. Mexico, Peru, Colombia and Chile have also raised borrowing costs.

There are always individual country circumstances but such moves and levels provide quite a perspective when for example the Bank of England has just dithered over a 0.25% or 0,5% move and no doubt wishes it had moved by 0.5%, and a Bank Rate of 1%. There has been a lot of wailing and gnashing of teeth which must look rather confusing to those in Latin America or Africa,

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Some are cutting interest-rates

The coordinated line has a bit of a struggle with the ECB although it is now promising to join the interest-rate party and more so with the Bank of Japan. But I would not be surprised to see more interest-rate cuts from China in addition to this

One major economy bucking the trend is China, where mounting economic damage from widespread virus restrictions and troubles in the property sector prompted officials to cut the one-year loan prime rate by 10 basis points from 3.8 per cent to 3.7 per cent. Private lenders have also lowered their mortgage rates.

Plus there was this last week.

The Bank of Russia Board of Directors decided to cut the key rate by 300 basis points to 11.00% per annum effective from 27 May 2022.

If course the war and then the fall followed by the strong rally of the Rouble has affected this.

What happens next?

The FT seems to be pushing a bullish ( for interest-rates) line.

McKeown said that of 20 major central banks around the world, 16 are likely to raise interest rates over the next six months. Tightening is expected to be fastest in the US and UK.

That refers to what markets are pricing in and others are expected to join the move.

Markets expect an increase in policy rates by at least 100 basis points by the end of this year or early next year in the eurozone, Canada, Australia and New Zealand.

Still I am pleased to see that they have got around to agreeing with my theme that central bankers are pack animals.

Keller said the widespread trend made it more likely policymakers would consider more substantial moves: “Announcing unexpectedly larger or earlier policy steps feels easier if everyone else is doing them.”

Comment

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If we look at the western world then I think the words of Elvis Presley are appropriate.

A little less conversation, a little more action, please
All this aggravation ain’t satisfactioning me
A little more bite and a little less bark.

The actual interest-rate increases in the US and UK have been minor for example. Also they had to be forced into doing it as inflation was already rising before this.

The sudden shift in policy comes as inflation has reached multi-decade highs in many countries, fuelled by soaring energy and food costs since Russia invaded Ukraine in February. ( FT)

As it happens the inflation picture continues to defy the “Transitory” claims of last year if today’s figures from the Euro area are a good guide to the official number tomorrow.

In May, the estimated annual variation rate of the HCPI stood at 8.5%, two tenths more than
the one registered in the previous month.
For its part, the estimated monthly variation of the HCPI is 0.7%. ( Spain)

According to ECB President Christine Lagarde it was supposed to be a “hump.”

Also I am expecting more fiscal policy. The UK has acted for example on energy costs and I expect others will do the same.

So in the short-term I expect the central banks in the West to act but I still expect them to start to struggle once they reach 2% and let’s face it we have a way to go before we get there. As an aside the central banks will be causing mark to market and increasingly realised losses on all their QE bond holdings.

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