The Economics Hub Newsletter: Week 15
Summarizing central banks' decisions to hike interest rates, Weekly digest of notable news in finance, privacy, crypto and Charts of the week
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Summarizing this Week’s Interest Rates Related Monetary Policy Decisions by Central Banks
Countries Covered: USA, England, Switzerland, Turkey, Japan, Norway, Taiwan, Vietnam, Indonesia, South Africa, UAE, Saudi Arabia, Qatar, Bahrain, and Brazil.
Google Results Spiked for “How to leave Russia” after Putin’s speech.
The Cost of Europe’s Energy Crisis.
A typical “60/40 Portfolio” is down 19.3% in 2022, the 2nd worst year in history after 1931.
More than 40 central banks have increased interest rates by at least a three-quarter point in one go since the start of 2022.
Fund managers are favourably long Healthcare, Staples and Energy; and short Discretionary, Industrial and Tech stocks.
Goldman’s US Financial Conditions index is hitting fresh highs.
Financial conditions relative to their 5-year average are at Great Financial Crisis levels.
Consumers are Struggling to Pay their Longer-Term Credit Card Debt.
Cost of shipping around world via container (ocean freight rates) continues to collapse.
Norway's Sovereign Wealth Fund’s Stock Portfolio Breakdown.
Background: Central Banks and Interest Rates
This was a crazy week for macro with lots of updates across the board.
Following the Federal Reserve’s latest interest rate hikes of 75 bps, central banks across the globe have also continued raising rates this week. It is worth mentioning that they are raising their key interest rates in the most widespread tightening of monetary policy on record ever. For instance, the number of rate increases announced by central banks around the world was the highest in July since records began in the early 1970s — according to the World Bank.
Notably, the size of these rate hikes is now progressively rising as central banks become desperate to reduce soaring inflation, which is already at multi decades high in most countries.
See, central banks’ theoretical rationale for hiking interest rates is to reduce overall demand in the economy. By increasing key policy rates, they aim to increase the cost of borrowing for households and businesses. As a result, consumer spending and investment activity fall for major economic sectors. When demand for goods and services decreases, their price tends to decline. This is exactly what central banks intend to do now: curb spending to curb inflation.
Nevertheless, it is now evident that they aren’t hesitating to do their part in taming inflation, irrespective of its *actual* effectiveness in combating inflationary pressures in the economy — which seems to have been exacerbated by the supply chain issues, global commodity crunch and energy crisis. It is reasonable to question the effectiveness of monetary policies, when the drivers of inflation are country/region specific and monetary policy, through interest rate adjustments, might do little to fix these issues.
In fact, some economists fear that the central banks may go too far if they don’t take into account their collective impact on global demand and might drive the global economy into a recession.
Okay, now that we are done with a bit of background, let’s review the key interest rates-related decisions pursued by a group of central banks from across the world this week.
1. Federal Reserve
The Federal Reserve on Wednesday raised benchmark interest rates by another three-quarter of a percentage point and indicated it will keep hiking well above the current level. Fed took its federal funds rate up to a range of 3%-3.25%, the highest it has been since early 2008, following the third consecutive 0.75 percentage point move.
They are now raising rates at the most rapid pace since the 1980s and have approved increases at five consecutive policy meetings, starting in March when they lifted the fed-funds rate from near zero. Until June, the Fed hadn’t raised rates by 0.75 point since 1994.
“My main message has not changed since Jackson Hole,” Powell said in his post-meeting news conference, referring to his policy speech at the Fed’s annual symposium in August in Wyoming. “The FOMC is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done.”
The “dot plot” of individual members’ expectations doesn’t point to rate cuts until 2024. Powell and his colleagues have emphasized in recent weeks that it is unlikely rate cuts will happen next year, as the market had been pricing.
2. Bank of England
At its meeting ending on 21 September 2022, the Bank of England’s MPC voted to increase Bank Rate by 0.5 percentage points, to 2.25% — taking it to the highest level since late 2008 but disappointing some who had thought it would make a three-quarter-point move.
In Britain, consumer prices rose 9.9 percent in August from a year earlier, slowing slightly from the previous month but still near the fastest pace of inflation in four decades, as energy and food prices climbed higher.
The BOE now expects inflation to peak at just under 11% in October, down from a previous forecast of 13%.
The hike was in line with economists’ forecasts, according to Reuters, however many in the market had been expecting a 75-basis-point raise, in line with the U.S. Federal Reserve and many other major central banks.
In a release explaining its decision, the bank noted volatility in wholesale gas prices but said announcements of government caps on energy bills would limit further increases in consumer price index inflation. However, it said there had been more signs since August of “continuing strength in domestically generated inflation.”
3. The Swiss National Bank
The Swiss National Bank on Thursday raised its benchmark interest rate to 0.5%, a shift that brings an end to an era of negative rates in Europe. The 75 basis point increase comes after a rate hike of -0.25% on June 16, the first in 15 years. Previously, the Swiss central bank has kept interest rates at -0.75% since 2015.
The interest rate hikes come after inflation in Switzerland hit 3.5% last month — its highest rate in three decades.
The bank said raising the policy rate was “countering the renewed rise in inflationary pressure and the spread of inflation to goods and services that have so far been less affected.” It added that further policy rate increases “cannot be ruled out.”
4. Bank of Japan
The Bank of Japan has maintained ultra-low interest rates and dovish policy guidance as it seeks to reassure markets that it will continue to swim against a global tide of central banks tightening monetary policy to combat soaring inflation.
The annual inflation rate in Japan rose to 3% in August, the highest level since September 2014, largely driven by food and raw materials prices as well as yen weakness.
5. Norges Bank (Norway)
Norway's central bank raised its benchmark interest rate by a widely-anticipated 50 basis points to 2.25% on Thursday, but said future hikes would be more "gradual."
Norges Bank will probably hike again in November, by 25 basis points (bps), although predictions are unusually uncertain at the moment, its governor Ida Wolden Bache said. Norges Bank was the first major central bank to begin hiking rates in September 2021, and could now be the first to signal that the peak is near, analysts said.
The Norwegian policy rate, now at its highest since 2011, is currently set to peak at 3% next year and could start falling in 2024, Norges Bank's forecasts showed. The policy rate was zero a year ago, and the hikes are now starting to have a tightening effect on the Norwegian economy, Norges Bank said.
6. South African Reserve Bank
South Africa’s central bank delivered another big interest rate hike on Thursday, taking its main lending rate back near pre-COVID levels as it battles to bring inflation back to target.
The South African Reserve Bank (SARB) raised its repurchase rate by 75 basis points (bps) to 6.25%, in line with the forecast of the majority of economists polled by Reuters. The SARB has now raised rates for the sixth time in a row, adding a total of 275 bps to the repo rate since its latest tightening cycle began in November 2021.
7. Central Bank of the UAE
The Central Bank of the United Arab Emirates said on Wednesday it was hiking its base rate by three-quarters of a percentage point to 3.15% effective from Thursday, moving in parallel with the U.S. Federal Reserve's third straight hike of that size as its currency is pegged to the dollar.
8. The Saudi Central Bank
The Saudi Central Bank (SAMA) hiked its reverse repo rate by 75 bps to 325 bps from 250 bps. It also increased its repo rate to 375 bps (3.75 per cent) from 300 bps. This recent rate hike is the fifth this year, as the central bank raised rates in March, May, June and July.
In line with the Saudi Central Bank's objective of maintaining monetary and financial stability, and in light of recent global developments, SAMA has decided to raise the rate of Repurchase Agreement (Repo) by 75 basis points to 3.75 percent, and the rate of Reverse Repurchase Agreement (Reverse Repo) by 75 basis points to 3.25 percent.
9. Central Bank of the Republic of China (Taiwan)
Taiwan’s central bank increased its benchmark interest rate by a modest amount on Thursday, the third hike this year, as it tries to battle inflation without further weighing down its slowing economy.
The central bank raised its policy rate by 12.5 basis points to 1.625%, in line with forecasts of most economists surveyed by Bloomberg. It also increased its reserve requirement ratio by a quarter point.
At the same time, the bank cut its 2022 economic growth forecast for the third time this year -- to 3.51% -- with gross domestic product expected to slow further next year to 2.9%.
10. State Bank of Vietnam
Vietnam's central bank announced on Thursday it would raise its policy rates by 100 basis points, in a rare monetary tightening move aimed at keeping inflation under 4% this year.
Can Van Luc, an economist with the Bank for Investment and Development of Vietnam and an advisor to the government, said the rate hike "is in line with the global trend and is expected to help better control inflation in Vietnam."
Before the series of rate hikes, Vietnam’s central bank had left its key rates unchanged since late 2020
11. Bank Indonesia
Indonesia's central bank increased interest rates by more than expected on Thursday as it sought to rein in inflation after the government raised subsidised fuel prices earlier this month, while also supporting the rupiah currency.
The BI Board of Governors agreed on 21st and 22nd September 2022 to raise the BI 7-Day Reverse Repo Rate (BI7DRR) by 50bps to 4.25%, while also raising the Deposit Facility (DF) and Lending Facility (LF) rates by 50bps to 3.50% and 5.00% respectively.
The rate decision comes after the government raised fuel prices by about 30% earlier this month, a move that BI Governor Perry Warjiyo said would push headline inflation to peak at slightly above 6% and core inflation at 4.6% by year-end, before easing.
The decision to raise the policy rate was taken as a front-loaded, pre-emptive and forward-looking measure to lower inflation expectations and return core inflation to the 3.0%±1% target corridor in the latter half of 2023, while simultaneously strengthening the exchange rate stabilisation policy in line with the rupiah's fundamental value, caused by elevated global financial market uncertainty amid strong and increasing domestic demand.
12. Central Bank of Brazil
The Central Bank of Brazil (BCB) left interest rates unchanged at its monetary policy meeting on September 21. As a result, the key Selic rate remains at 13.75%. The latest monetary policy decision put an end to twelve consecutive increases which took off in 2021 to bring down inflation. In doing so, the BCB became the first central bank from a large economy to pause the cycle of interest rate increases.
The Committee judges that this decision reflects the uncertainty around its scenarios for prospective inflation, an even higher-than-usual variance in the balance of risks, and is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon for monetary policy, which includes 2023 and, to a lesser extent, 2024.
The Committee will remain vigilant, assessing if the strategy of maintaining the Selic rate for a sufficiently long period will be enough to ensure the convergence of inflation. The Committee emphasizes that it will persist until the disinflationary process consolidates and inflation expectations anchor around its targets. The Committee reinforces that future monetary policy steps can be adjusted and will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected.
13. Central Bank of the Republic of Turkey
Surprisingly, Turkey stands out from the crowd as it becomes one of the rarest central banks in the world to cut its key interest rate this week. The country’s monetary policymakers opted for a 100 basis point cut, bringing the key one-week repurchase rate from 13% to 12% — this is despite the country’s rapidly soaring inflation. In August, the Turkish inflation rate was recorded at 80.2%, quickening for the 15th consecutive month and the highest level in 24 years.
The Central Bank of Turkey’s (unconventional) reasoning for lowering key interest rates in such a volatile geopolitical and inflationary environment can be understood from its press statement:
It is important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk. Accordingly, the Committee has decided to reduce the policy rate by 100 basis points, and has assessed that the updated level of policy rate is adequate under the current outlook. To create an institutional basis for sustainable price stability, the comprehensive review of the policy framework continues with the aim of encouraging permanent and strengthened liraization in all policy tools of the CBRT. The credit, collateral and liquidity policy actions, of which the review process is finalized, will continue to be implemented to strengthen the effectiveness of the monetary policy transmission mechanism.
Turkey's unconventional policy approach has long astounded investors and economists, who believe the refusal to tighten policy is due to political pressure from Turkish President Recep Tayyip Erdogan. Erdogan has long railed against interest rates and turned against economic orthodoxy by insisting that lowering rates is the best way to reduce inflation.
Analysts called the monetary easing unsustainable and driven by President Erdogan's effort to lower borrowing costs to stoke exports and investment, and they predicted more currency depreciation ahead.
14. Qatar Central Bank
The Qatar Central Bank on Wednesday raised its deposit rate from 3% to 3.75%, its lending rate from 3.75% to 4.5% and its repo rate from 3.25% to 4%.
15. The Central Bank of Bahrain
The Central Bank of Bahrain raised the rate for its one-week deposit facility from 3.25% to 4%, as well as its overnight deposit rate from 3.00% to 3.75%, the four-week deposit rate from 4.00% to 4.75% and lending rates from 4.50% to 5.25%.
In light of the development of the international financial market and the continuous measures taken by the CBB to ensure the smooth functioning of the money markets in the Kingdom of Bahrain, the Central Bank of Bahrain (CBB) has decided to raise its key policy interest rate.
The CBB continues to monitor global and local market developments closely in order to take any further necessary actions to maintain monetary and financial stability in the Kingdom.
Finance and Economics - Weekly Digest
Singapore Overtakes Hong Kong in World Financial Centers Ranking. (South China Morning Post)
The Global Race to Hike Rates Tilts Economies Toward Recession. (Bloomberg)
Electric-Car Demand Pushes Lithium Prices to Records. (The Wall Street Journal)
Tightening liquidity may force Indian banks to compete harder for deposits. (Reuters)
U.S. mortgage interest rates reach 6.25%, highest level since October 2008. (Reuters)
Emerging Markets Stocks hit 28-month lows on Fed outlook; cenbanks in focus. (Nasdaq)
Fed Interest Rates Hikes might Affect Rural America (International Monetary Fund)
India Inc expects another 35-50 basis points policy rate hike by RBI. (ET Wealth)
After Fed, RBI may hike rates; how will it impact your equity, debt mutual funds? (The Economics Times)
BofA Says Cash Is King as Investor Pessimism Hits 2008-Era High. (Bloomberg)
The 12 Charts to Watch in 2022 [Q4 Update] (TopDown charts)
2-year Treasury yield surges above 4.1% after Fed hike, highest level since 2007. (CNBC)
Quantifying the role of interest rates, the Dollar and Covid in oil prices. (Bank for International Settlements Working Paper)
Russian banks lost around $25 billion from Ukraine conflict, central bank official says. (Reuters)
The Unexpected Rise in Remittances to Central America and Mexico During the Pandemic. (International Monetary Fund)
Japan intervenes to stop yen slide, after BOJ holds rates super low. (Reuters)
More Americans Are Stuck With Long-Term Credit-Card Debt. (Yahoo)
14 ways to cut flying costs while booking air tickets (ET Wealth)
Privacy - Major Headlines of the Week
Exclusive Report: The right to privacy in the digital age. (United Nations)
US to expand internet access to help Iranians evade state surveillance. (Guardian)
Proton follows other VPNs in pulling servers out of India over new anti-privacy laws. (Reclaim the Net)
Morgan Stanley hard drives holding sensitive client data got auctioned off online (CNN)
$35M fine for Morgan Stanley after unencrypted, unwiped hard drives are auctioned. (ARS)
Revealed: US Military Bought Mass Monitoring Tool That Includes Internet Browsing, Email Data. (Motherboard by Vice)
Military Whistleblower Challenges Pentagon's Warrantless Purchase Of Internet Data. (The Dissenter)
San Francisco votes to give cops access to private CCTV cameras. (Reclaim the Net)
Ad-blocker AdGuard struggles with Google’s extension rules. (Reclaim the Net)
As unrest grows, Iran restricts access to Instagram, WhatsApp (Reuters)
Facebook Report Concludes Company Censorship Violated Palestinian Human Rights. (The Intercept)
Would you geotag your home for your government? 50 million Indians did. (Rest of World)
Proton launches Proton Drive (Proton)
EU parliament majority now in favor of banning AI surveillance in public. (Biometrics Update)
EU Court Rules Against German Data Collection Law. (Security Week)
Advocates still see a lot of danger for individuals using government digital IDs. (Biometrics Update)
Rights holders end legal demands for ISPs to ban movie pirates from the internet. (Reclaim the Net)
Beijing bus drivers have been told to wear wristbands to monitor their emotions. (South China Morning Post)
Crypto Corner
White House Releases First-Ever Comprehensive Framework for Responsible Development of Digital Assets. (The White House)
Bitcoin Dips as Fed Again Raises Interest Rates to Combat Inflation. (Decrypt)
For Myanmar’s revolutionaries, adopting digital currency can mean life or death. (Rest of World)
EU Finalizes Legal Text for Landmark Crypto Regulations Under MiCA (Coindesk)
Japan makes big steps towards a cashless society. (Reclaim the Net)
Nasdaq Starts Crypto Custody Service for Institutional Clients. (Coindesk)
Was the Ethereum Merge a Mistake? (Decrypt)
Crypto market de-risking. (Arcane Research)
Miscellaneous
How Mathematical Curves Enable Advanced Communication. (Quanta Magazine)
Israeli Forces Deliberately Killed Palestinian American Journalist, Report Shows. (The Intercept)
How the War Changed Overnight. (Consortium News)
Text of Putin’s Speech. (Consortium News)
Protests in Russia against mobilisation – in pictures (Guardian)
Report from Moscow: Antiwar Protests Grow as Thousands Flee Russia to Avoid Being Drafted into Army. (Democracy Now)
87% of world doesn't support West's new cold war on Russia. (Multipolarista)
Mahsa Amini’s death could be the spark that ignites Iran around women’s rights. (Guardian)
Puerto Rico’s vulnerability to hurricanes is magnified by weak government and bureaucratic roadblocks. (The Conversation)
Charts of the Week
1. Google Results Spiked for “How to leave Russia” after Putin’s speech
2. The Cost of Europe’s Energy Crisis
Using data from Bruegel, the infographic above reflects spending on national policies, regulation, and subsidies in response to the energy crisis for select European countries between September 2021 and July 2022. All figures in U.S. dollars.
3. A typical “60/40 Portfolio” is down 19.3% in 2022, on pace to become the 2nd worst year in history after 1931.
4. Global (Official) Inflation Rates Update:
5. More than 40 central banks have increased interest rates by at least a three-quarter point in one go since the start of 2022
6. Fund managers are favourably long Healthcare, Staples and Energy; and short Discretionary, Industrial and Tech stocks
7. Goldman’s US Financial Conditions index is hitting fresh highs
8. Financial conditions relative to their 5-year average are at Great Financial Crisis levels
9. Consumers are Struggling to Pay their Longer-Term Credit Card Debt
10. Cost of shipping around world via container (ocean freight rates) continues to collapse
11. Norway's Sovereign Wealth Fund’s Stock Portfolio Breakdown
That’s all for this week folks, and thank you so much for making it this far! I hope you had lots of takeaways. Please subscribe if you haven’t yet and yes, subscriptions won't cost you a penny. It’s free!
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Have a great week ahead,
Shreyas
Also, you might know this but Union Bank of India is offering the highest interest in 3 year and 800 days deposits. It is the highest of all banks at 7.5% but nobody is talking about this. Aight bye