The tightening interest rate cycle is now biting
With the exception of the Reserve Bank of New Zealand, which commenced its monetary policy tightening cycle in October 2021, well ahead of their English-speaking counterparts – the other major English-speaking Central Banks have tried to play “catch-up football” in recent months to counter the multi-decade growth in inflationary expectations.
Since June 2022, the U.S. Federal Reserve have tightened twice by 0.75 per cent in July and September, respectively, to over 3.0 per cent. The Bank of England increased twice by 0.5 per cent in August and September to 2.25 per cent – but their economy is, on a relative basis, under enormous pressure from the brutal increase in energy prices. The Bank of Canada tightened by 1.0 per cent in July and 0.75 per cent in September to 3.25 per cent. And the slow coach of the class, the Reserve Bank of Australia, increased four times, by 0.5 per cent in each of July, August and September, and by 0.25 per cent in October, to 2.60 per cent.
The average increase in official cash rates amongst the five English-speaking economies sampled below since June is 1.50 per cent.
Changes to official cash rates (%)
|
New Zealand Date |
% |
USA
Date |
% |
UK
Date |
% |
Canada
Date |
% |
Australia
Date |
% |
|
2021 |
|
|
|
|
|
|
|
|
|
|
6/10 |
0.50 |
|
|
|
|
|
|
|
|
|
24/10 |
0.75 |
|
|
16/12 |
0.25 |
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
23/2 |
1.00 |
17/3 |
0.25 |
3/2 |
0.50 |
26/1 |
0.25 |
6/4 |
0.35 |
|
13/4 |
1.50 |
5/5 |
0.75 |
17/3 |
0.75 |
2/3 |
0.50 |
8/6 |
0.85 |
|
25/5 |
2.00 |
15/6 |
1.50 |
5/5 |
1.00 |
13/4 |
1.00 |
5/7 |
1.35 |
|
13/7 |
2.50 |
27/7 |
2.25 |
16/6 |
1.25 |
1/6 |
1.50 |
2/8 |
1.85 |
|
17/8 |
3.00 |
21/9 |
3.00 |
4/8 |
1.75 |
14/7 |
2.50 |
6/9 |
2.35 |
|
|
|
|
|
22/9 |
2.25 |
8/9 |
3.25 |
4/10 |
2.60 |
|
Increase since June ‘22 |
+1.00 |
|
+1.50 |
|
+1.25 |
|
+1.75 |
|
+1.75 |
On Monday night the U.S. Institute for Supply Management’s measure for new orders in September declined by more than 4 points to 47.1, the lowest level since the early months of the COVID-19 pandemic and an indication that demand is softening. Companies are adjusting to potential future lower demand.
The combination of large consumer indebtedness, declining residential prices admittedly from eye-watering levels, and the large jump in cost of living via energy and fuel costs is seeing the tightening interest rate cycle starting to bite across the major English-speaking economies.
Logically, the Central Banks should exhibit greater restraint in their tightening process over the foreseeable future.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Ben
:
Logic won’t be used
We did see hint of pragmatism from our bank the reality the tightening has caused currency issues.
That is Australia greatest issue for inflation as we don’t even control
Our own fuel supplies .
Let alone most other stuff that’s imported
The I trest rate on government debt will go up exponentially beaches of the dollar issues causing government buskers both at federal and state to be compromised going forward.
Ben
David Buckland
:
Thanks Ben. I’m most worried the Central Banks are, in trying to fight inflation, late to the tightening cycle and will likely be late to the restraint cycle. Not controlling fuel supply, combined with depreciating currency, will be testing. The UK and Europe, particularly, look set for a tough Winter as cost of living expenses, including fuel and energy, hit hard.