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What you need to know
- Global central banks have begun a monetary policy tightening process, raising interest rates to curb accelerating inflation.
- The United States Federal Reserve is leading the way for western democracies with the fastest interest rate rises so far (from 0.25% to 3.25%, February 2022 to October 2022). This has led to a strengthening of the US dollar compared to most major currencies.
- The Reserve Bank of Australia (RBA) has raised rates from 0.25% to 2.60% (April 2022 to October 2022).
- At their October meeting, the RBA raised rates by 0.25% less than the expected 0.50%, leading some to speculate that the worst of the rate rises are over (markets initially rallied on this news).
- The Australian dollar remains relatively strong but will suffer from an expected drop in iron ore prices.
- According to the Bank of International Settlements, Australian households are the most indebted in the world, largely due to home ownership, making Australians particularly vulnerable to rate rises and the increase in the costs of servicing these loans.
- On the other hand, according to Credit Suisse’s annual global wealth report, Australians have the highest median wealth in the world. Again, largely due to home ownership.
- Japan continues to persist with its policy of negative interest rates despite a slump in their currency and accelerating inflation (although this is still relatively low compared to most western economies).
- Most central banks have been late to the party with rate rises, having initially denied the existence of inflation or brushing it off as “transitory” due to supply chain bottlenecks and the war in Ukraine.
- Currently all measures of supply chain bottlenecks, cargo transit times, and spot rates are down. Yet inflation continues to rise.
The Global State of Play
Australia
Current interest rate: 2.60%
Expected peak: 3.60% by February 2023 (Westpac, ANZ)
Next interest rate decision: November 1
United States of America
Current interest rate: 3.25%
Expected peak: 4.90% by April 2023 (Bloomberg)
Next interest rate decision: November 3
Eurozone
Current interest rate: 1.25%
Expected peak: 3.50% by April 2023 (Bloomberg)
Next interest rate decision: October 27
Japan
Current interest rate: -0.10%
Expected peak: Remaining stable at -0.10% by the end of 2024 (ING)
Next interest rate decision: October 28
United Kingdom
Current interest rate: 2.25%
Expected peak: 6.00% by July 2023 (Bloomberg)
Next interest rate decision: November 3
India
Current interest rate: 5.90%
Expected peak: 6.25% by December 2022 (RBI)
Next interest rate decision: December 7
South Korea
Current interest rate: 3.00%
Expected peak: 3.50% by April 2023 (Bank of Korea)
Next interest rate decision: November 24
New Zealand
Current interest rate: 3.50%
Expected peak: 4.10% (RBNZ)
Next interest rate decision: November 23
Economic Facts of Note
- Global debt is now in excess of $300 trillion (256% of global GDP), that means for every 5% interest rate rise, debt servicing costs increase by $15 trillion.
- The United States baby boomer generation owns 14.32% of entire global wealth.
At the end of each of the past eight tightening cycles (interest rate increase cycle) the US Federal Reserve’s interest rate has exceeded CPI (inflation) before CPI started to fall. With US year on year CPI currently running at 8.3%, should history be repeated, interest rates would need to exceed 8.3% before inflation comes back under control.
