Global Rates – Multi–Speed “Tour De Monde”

22 September 2022

Read Time 2 MIN

Most global central banks will have to continue tightening at a brisk pace to deal with inflation, but some – like Brazil – are closer to the finish line.

Global Rate Hikes

The global monetary policy “peloton” is firmly in hawkish mode, moving at a brisk pace in its uphill inflation battle. Yesterday’s 75bps rate hike in the U.S. – accompanied by Chairman Jerome Powell’s hawkish press conference – led to multiple upside revisions of the November rate call for the U.S. Federal Reserve (Fed), as well as a higher terminal rate projection (see chart below). The Bank of England hiked by 50bps (in a split vote with some support for +75bps) and the Philippines delivered the expected 50bps rate hike, as there is evidence that domestic demand pressures are getting stronger. Some “peloton” members, however, are having dovish thoughts – driven, in part, by currency considerations. Take Switzerland, for example. The central bank finally left the land of negative policy rates this morning with a 75bps rate hike, but it was less aggressive than expected by many observers, and the statement was not hawkish either.

The End of Tightening Cycles

Some global tightening race participants are getting closer to the finish line. Brazil kept the policy rate on hold yesterday, but a 13.75% policy rate still translates into the highest ex–ante real policy rate among major emerging markets (EMs), as well as into a double–digit rate differential with the Fed. Norway is widely considered a “policy normalization” trailblazer in developed markets (DM), and today’s central bank statement opened the door for a slower pace of hikes going forward. Latecomers to the global tightening party, however, now have to run faster just to keep up with the “peloton”. The Indonesian central bank went for a larger than expected +50bps rate hike today. Details of South Africa’s rate–setting meeting looked even more hawkish than a sizable 75bps rate hike, as two members of the board voted for a 100bps move due to rising inflation pressures.

Turkey Policy Mistakes

And there are monetary policy Tour de Monde participants who seemingly lost the sense of direction and took the wrong turn… again. Yep, we are talking about Turkey’s decision to cut its policy rate by another 100bps to 12%. Authorities are clearly prioritizing growth in the run up to the elections, as domestic activity is softening. The currency’s relative stability may be a factor in today’s decision, but with annual inflation running around 80% (!), outright rate cuts make absolutely no sense, and they will likely worsen the macroeconomic imbalances (including external ones) going forward. Stay tuned!

Chart at a Glance: Market Raised Its Expectations for the U.S. Fed

Chart at a Glance: Market Raised Its Expectations for the U.S. Fed

Source: Bloomberg LP.

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