A Parade of Central Bank Interest Rate Decision and A Shift Away from Risky Assets
September 21, 2023
Sovereign debt has been well-bid in the wake of the Fed’s message not to expect interest rates to fall much in 2024. Many other central banks have chimed in with hawkish messages today. Ten-year sovereign debt yields rose overnight by nine basis points in Italy, seven basis points in the U.K., six bps in the United States, five bps in France and Spain and four bps in Germany.
Alternatively, the price of bitcoin is down 2.3%, and gold has fallen 1.5%. Equities closed down 1.7% in South Korea, 1.4% in Japan and Australia, 1.3% in Hong Kong and Taiwan, 1.2% in Singapore, 0.9% in India and 0.8% in China. Continental European markets and both the Nasdaq and S&P 500 have fallen 1.0% or more.
Among other central banks that reviewed monetary policies, interest rates were left unchanged in Taiwan, Indonesia, the Philippines, Switzerland, South Africa, and the Bank of England.
- Taiwan’s discount rate from March 2022 through March 2023 had been raised from a record low of 1.125% to 1.875%. Projected growth this year was revised downward to 1.5% but then doubles to a tad over 3.0% next year with inflation below the 2% threshold.
- Amid the pandemic, Bank Indonesia’s 7-day reverse repo rate was reduced to 3.5% as of February 2021, but then was increased between August 2022 and January 2023 by 225 basis points to its current 5.75%. From a 7-year high of 5.95% hit a year ago, CPI inflation retreated to a 16-year low of 3.08% in July and, at 3.27% last month, was below the 2-4% target ceiling.
- The Filipino central bank interest rate has been at 6.25% since a 25-basis point hike last March that culminated 350 basis points of tightening that began in May 2022. CPI inflation jumped by 0.6 percentage points to 5.3%, well above the 2-4% target range, but growth is weak.
- The Swiss National Bank‘s policy interest rate had been as low as -0.75% in the pandemic, then was raised by 175 basis points in 2022 and a further 75 bps to its current 1.75% level in the first half of this year. Today’s pause in tightening observes that CPI inflation has dropped to 1.6% as of August, reflecting import price developments largely. More importantly, projected inflation from mid-2024 has been revised lower and is now expected to plateau at 1.9% in 2025 and first half 2026. That said, officials warn that “it cannot be ruled out that a further tightening of
monetary policy may become necessary” and intervention may be used on a discretionary basis to forestall excessive franc overvaluation. - Monetary tightening commenced at the South African Reserve Bank with a 25-basis point rate hike in November 2021 from a base of 3.5%. Increases totaled 325 bps in 2020 and 125 bps in the first half of 2023 to the current level of 8.25%, but CPI inflation has slowed only from 7.6% last October to 4.8% as of August. That’s still well above target, and a statement asserts that inflation risks are skewed to the upside. Today’s decision not to raise the interest rate was agreed by a narrow 3-2 vote with the dissents favoring a rate increase of 25 bps. Despite projected growth of 0.7%, more restraint might be needed.
- The Bank of England’s decision to leave its Bank Rate unchanged at 5.25% was also razor-thin at 5-4, with Cunliffe, Greene, Haskell and Mann each favoring a 25-basis point hike. The majority felt that the drop of inflation from 8.7% in May to 6.7% by August, plus signs of lessened labor market tightness, warranted a pause. The interest rate had previously been raised from 0.10% up to December 2021 to the current 15-year high of 5.25%, and markets were expecting a 25-basis point increase at this week’s meeting.
The Swedish Riksbank‘s executive board engineered a 25-basis point interest rate hike to 4.0% today, claiming that “inflationary pressures in the Swedish economy are still too high.” That compares with a zero percent rate at the start of the second quarter of 2022 and -0.50% in November 2018. Swedish inflation of 7.5% is far from target, and officials today noted that “the forecast for the policy rate indicates that it could be raised further.”
The Bank of Norway‘s interest rate was also raised 25 basis points today, bring such to a 15-year high of 4.25% versus a pandemic low of zero percent until September 2021. “Whether additional tightening will be needed depends on economic developments. There will likely be one additional policy rate hike, most probably in December”, said Governor Ida Wolden Bache. Norwegian CPI inflation has slowed from a 35-year high of 7.5% to 4.8% but remins more than double the 2% target. The statement also suggests that the rate will not be cut until 2025.
Today’s biggest splash came from the Central Bank of Turkey, where the one-week repo rate was raised 500 basis points to a 20-year high of 30%. Four hikes since the start of June totalling 21.5 percentage points still leaves the interest rate well short of year-on-year inflation that accelerated to 58.9% from 38.2% in June. More rate hikes are inevitable: “Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved.”
The Bank of Brazil’s Selic rate was cut by 50 basis points to 12.75%. It had been cut that amount in August as well. The rate previously had been increased by 725 basis points in 2021 and another 450 bps last year. A further half percentage point cut is thought likely at the next policy review.
U.S. data released today showed an unexpected 20k drop in new jobless claims to their lowest level since the final week of January; a 0.7% drop in existing home sales in August; a smaller-than-forecast current account deficit of $212 billion last quarter, equal to 3.2% of GDP, which is similar to the first quarter gap but well above the pre-pandemic 2.3% ratio in 2018-19; a 25.5 point deterioration in the Philly Fed manufacturing index this month; and a 0.4% slide in the U.S. index of leading economic indicators that has been falling since March 2022.
French business confidence rose 0.4 points in September, maintaining a pretty flat trend for a sixth straight month.
Consumer confidence this month fell to a 4-month low in Denmark but rose to a 19-month high in Belgium and 2-month highs in the Netherlands and Turkey.
CPI inflation in Hong Kong last month remained at July’s one-year low of 1.8%. The former British colony’s current account last quarter equaled 10.7% of GDP.
Producer price inflation in August fell more deeply below zero percent to -8.9% in Latvia and dropped to a 29-month low of +2.1% in Slovenia.
GDP in New Zealand last quarter rose 0.9%, but year-on-year growth slowed to a one-year low of only 1.8%.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank Indonesia, Bank of Brazil, Bank of England, Bank of Norway, Central Bank of The Philippines, South African Reserve Bank, Swedish Riksbank, Swiss National Bank
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