Varying Central Bank Interest Rate Changes to Tackle Inflation

October 6, 2022

The global environment of high inflation, slower economic growth, and central banks raising interest rates has favored the dollar. The weighted DXY dollar  index climbed 0.4% overnight.

Although the poorly received plan to eliminate the highest British tax bracket has been withdrawn, British financial markets remain especially vulnerable. Sterling is 0.5% weaker today against the dollar. The 10-year gilt yield jumped 12 basis points, and the British FTSE has slipped 0.8%.

Share prices closed up 1.3% in India, 1.0% in South Korea and 0.7% in Japan. China’s market remains closed for the holiday commemorating the Communist ascension to power in 1949. Equities in the U.S., Germany and France are 0.3% softer.

OPEC+ oil ministers agreed on a two million barrel per day production cut. WTI rose only 0.2% additionally today. Overnight movement in the prices of gold and Bitcoin were similarly modest.

The Reserve Bank of New Zealand‘s Official Cash Rate was increased another 50 basis points to 3.5%, which is its highest level since April 2015. This was the fifth straight half percentage point increase since April and brings the cumulative rise over the past year to 325 basis points from a base of 0.25%. CPI inflation accelerated to 7.3% last quarter from 3.3% a year earlier and 1.5% in the second quarter of 2020, and core inflation is too high as well according to a released statement. “Wage pressures are heightened.” Consumer spending has proven surprisingly resilient in the face of lessening monetary accommodation, and more rate hikes will follow. Officials apparently discussed at their latest review whether to raise the OCR as much as 75 basis points. The objective is to return inflation to its 1-3% target corridor.

Officials at the National Bank of Serbia engineered their seventh consecutive rate hike today. The rate had been cut 125 basis points during 2020 and remained at just 1.0% until an initial 50-bp rate hike six months ago. There have been five half percentage point increases so far along with a pair of 25-bp moves at the July and August policy reviews. But Serbian inflation continues to swell, reaching a 135-month high of 13.2% in August versus 4.3% a year earlier and the central bank’s 3.0% medium-term target. The Executive Board seeks to reduce inflation to that target within its projection time horizon and is also concerned about the effect of mounting recessionary pressure in the euro area. There is a slight hint at the end of the Board’s statement that rate hikes could pause: “Depending on the global geopolitical situation and movement in key monetary and macroeconomic factors from the domestic and international environment in the period ahead, the NBS will assess if there is a need for further monetary tightening.”

In Iceland, the central bank’s incremental rate of change was lowered to a hike of 25 basis points from a 75-bp rise at the previous review and back-to-back hikes in May and June. In all, the Central Bank of Icelands interest rate has been increased by 375 basis points this year on top of a rise of 125 basis points in 2021. That more than reverses 225 basis points of reduction in the first pandemic year of 2020, and the seven-day term rate now stands at 5.75%. But CPI inflation, although below the recent peak of 9.9% in July, now stands at 9.3%, with an underlying care rate of 8.6%. Measures of expected inflation also exceed the Bank’s target, but the housing sector and overall demand growth have begun to slow in response to the tightening of policy.

In Eastern Europe, Romania’s policy interest rate was increased 75 basis points to 6.25%, its highest level since October 2011, But the National Bank of Poland policymakers surprised investors by leaving its 6.75% policy rate unchanged, preferring to pause tightening at least for a month while assessing growth and the impact  of previous tightening. The rate before an initial rate hike in October 2021 was just 0.10%.

A considerably larger full percentage point interest rate hike was announced today in Uganda. This move follows increases of 50 basis points in August and 100 bps in both May and July. Developing economies are especially vulnerable in the current high global inflation environment and rising trend of world interest rates because they hold lots of foreign currency-denominated debt and can ill-afford currency depreciation that balloons their debt servicing burdens. CPI inflation in Uganda climbed to 10.0% last month from 1.9% a year earlier, and today’s explanatory statement from the Central Bank identifies currency stabilization as an important step needed to restore its inflation target.

Hawkish minutes published today by the European Central Bank’s Governing Council meeting of September 7-8 shed useful information behind the record 75-basis point interest rate hike decided then. Officials recognize the onset of recessionary conditions yet are adamant that such mustn’t prevent needed forceful interest rate increases. Inflation risks are deemed skewed to the upside over the entire projection period, and while supply shocks played a key role, it is imperative that second-order inflation be prevented and that inflation expectations not destabilize in response. A discussion between raising rates by 50 bps or 75 bps occurred at September’s meeting, and the bigger move won out. Future policy actions will continue to be data dependent. There could be more increases as large as 75 bps, but that is not a foregone conclusion. The one certainty is that current very negative short-term real interest rates means that many additional interest rate hikes will be forthcoming.

Retail sales in the euro area fell 0.3% in August in volume terms. This was the third straight monthly decline and the fourth in five months. Sales were 2.0% fewer than in August 2021. Retails sales dropped 1.3% on month in Germany but rose 1.4%, 0.6% and 0.2% in Belgium, Austria and France.

There was more gloomy news about the German economy reported today.

  • Germany’s purchasing managers index for construction activity sank to a 19-month low of 41.8 in September, signaling a significant pace of contraction in that pivotal sector.
  • German industrial orders fell 2.4% on month in August, more than reversing July’s 1.9% advance, which had been the only monthly rise so far this year. Export orders dropped 1.7%, and domestic orders fell 3.4%.

While German construction contracted more sharply in September than August, the construction PMIs in France and Italy indicated a lessening pace of deterioration. Euroland’s collective construction PMI index rose 1.1 points above August’s 19-month low reading but, at 45.3, still conveyed considerable weakness.

In Britain, the construction PMI rebounded to a 3-month high of 52.3, but the sub-index for the sector’s outlook fell to a 26-month low.

India’s composite and service-sector purchasing manager indices (55.1 and 54.3, respectively) fell in September to their lowest levels in six and three months.

Singapore’s manufacturing PMI crossed over the 50 neutral threshold to a 27-month low of 49.9.

Australia’s construction PMI dropped to a 2-month low of 46.7. The smallest Australian trade surplus in a half year was also reported today. At A$ 8.324 billion in August, such was down from A$ 15.1 billion a year earlier.

Hong Kong’s private purchasing managers index dropped 3.2 points to a 6-month low of 48.0 last month.

Spanish industrial production rose 0.4% on month and 5.5% on year in August.

Today’s batch of price data revealed a 46-month low in Cypriot consumer price inflation of 8.7% in September versus 4.1%% a year earlier; The highest 12-month rate of increase in Dutch CPI inflation (14.5%) in over a half century and up from 2.7% in September 2021; and on-year rates of Taiwanese CPI and WPI inflation of 2.75% and 12.82% last month.

New U.S. jobless insurance claims increased last week to 219k, most in five weeks. The U.S. 30-year fixed mortgage rate last week of 6.75% was 23 basis points higher than in the previous week and 110 basis points above the rate during the week of August 19.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

 

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