September 22, 2023 | 14:54
Hike! Hold! Cut!
A year ago this week, the FOMC hiked rates 75 bps (and warned that “ongoing increases will be appropriate”); the BoE hiked rates 50 bps (with a mix of those calling for 25, 50 and 75) just before then-Chancellor Kwarteng tabled that infamous mini-budget with the biggest tax cuts since 1972; the Norges Bank hiked 50 bps; the SNB hiked 75 bps; the Riksbank hiked 100 bps (shock and awe!); and, the BoJ was on hold (leaving short-term rates at -0.1% and the 0% target on 10-year JGBs), after which the MoF intervened as the JPY plunged to ¥145. Note that the ECB and the BoC had both tightened 75 bps earlier in the month, with warnings of more to come.
Fast forward one year. The FOMC, the BoE and the SNB are on hold; Norges Bank hiked 25 bps; the Riksbank hiked 25 bps. Oh, and the BoJ is still on hold but the JPY is now nearing ¥150 with no sign of the MoF, except to say that it is watching currency markets with “a high sense of urgency”. Discuss amongst yourselves.
It all boils down to inflation… how far it has come, and how much farther it has to go, before policymakers can rest. Let’s look at a couple of examples. In the U.K., inflation eased from 11.1% last year to 6.7% now, and core fell from the recent peak of 7.1% to 6.2%. That is still high but the BoE took a break as it has seen the impact on the economy. We’ve all seen it: GDP fell in July and the jobless rate is at a near two-year high. The Bank is likely finished. In the Euro Area, inflation has been halved to 5.2%, but the core measure is stuck at 5.3%, not far from its recent peak of 5.7%. Not too surprisingly, the hawks squawked loudly this week. One warned that an October hike cannot be dismissed, and another brought December into the conversation. Although the ECB is likely finished, there is a possibility that one more increase will be pushed through before year-end. And, in Japan, the core CPI was steady at 3.1%, while core-core CPI was at its highest pace in over four decades; yet, the BoJ took its extended break as it is not seeing the accompanying upswing in wages. Hence, further weakening in the JPY.
No matter what each bank has been doing... the common theme is that they are all almost done.