RATE HIKES ENCIRCLE THE GLOBE
The world’s central banks collectively added almost 1,200 basis points, or 12 full percentage points, to interest rates in July, Reuters reported.
Central banks managing five of the ten most-traded currencies added 325 basis points. The so-called G10 group of industrialized countries have piled on 1,100 points to their key interest rates this year.
Canada was the most aggressive major economy last month, raising its policy rate by a full point to 1.5 percent. The U.S. Federal Reserve tacked on another three-quarters of a point to its federal funds rate.
New Zealand’s central bank officials raised the country’s key interest rate for the sixth time in as many meetings and signaled more are to come.
Among emerging markets, nine of 18 central banks boosted rates by a total of 850 basis points in July, bringing their total to 5,265 year-to-date, compared to 2,745 in all of 2021, Reuters said.
Colombia lifted its base rate by another 1.5 percent and Chile .75 percent.
Hungary jacked its rate twice last month, raising it by 3 percentage points to 10.75 percent, the first time since 2008 the rate has entered double digits.
More hikes are ahead, the bank said.
“Emerging market central banks remain more worried about inflation than growth,” David Hauner, an analyst with Bank of America, wrote in a recent research note.
Emerging nations have small, and often fragile, economies. Many of them took on sizable debt during the COVID War to cover their health care costs and keep their economies afloat.
Much of that debt must be repaid in dollars. As interest rates rise, dollars become more expensive and low-and modest-income nations must expend more of their resources to stockpile dollars to pay their bills—a task that has become even more challenging now that inflation is boosting the costs of food, fuel, and other essentials and commodity prices are sliding, as we report in “Commodity Prices Tank as Hedge Funds Exit” in this issue.
However, the pace of rate hikes is slowing, analysts told Reuters.
“We’ve reached peak hawkishness of central banks,” portfolio manager Christian Kopf at Union Investment, said to Reuters. “Central banks have made it clear they will not overdo it with rate hikes.”
That will be tricky.
“The magnitude of the inflation surge has been a surprise to central banks and markets, and there remains substantial uncertainty about the outlook for inflation, and inflation risks seem strongly tilted to the upside,” Tobias Adrian, director of the International Monetary Fund’s monetary and capital markets division, said in a Reuters interview.
There is a strong risk that upward pressures on prices are taking root in the economy and that consumers will no longer believe inflation can be restrained, he warned.
Consumers who believe inflation will not ease in the near future tend to shift spending patterns, buying things now before they become more expensive, which diverts money from savings and reduces banks’ ability to accumulate capital to make loans.
INFLATION IN CHILE REACHES 28-YEAR HIGH
In July, Chile’s inflation rate reached 13.1 percent, year on year, edging past the 13 percent analysts had predicted and touching its highest point since 1994.
Prices rose 1.4 percent from June.
The price of meat and fruit grew by 3.1 and 5.1 percent, respectively, in July, government statistics showed. Other groceries and non-alcoholic drinks cost 1.9 percent more.
Transportation costs jumped 3.4 percent; gasoline was up 4.6 percent.
Inflation in Chile has risen for 17 months in a row.
In 2021, the government permitted early, penalty-free pension withdrawals, setting off a spending surge at the same time that commodity prices shot up and the value of Chile’s peso tanked.
In response, the central bank raised its interest rate to 9.75 percent. Another increase is due in September, analysts predict.
On 14 July, Chile’s central bank announced a $25-billion purchase of pesos, which raised the currency’s value from 1,050 to the dollar to 909 on 9 August. The peso’s value also has become more stable since the bank intervened.
However, Chile is having trouble making payments on government bonds and consumer spending is still strong, two factors putting the economy at risk, president Rosanna Costa said in a 3 August public statement.
“Inflationary pressures are going to last into September or October,” Nathan Pincheira, chief economist at Finanzas y Negocios, said in comments quoted by Yahoo Finance. “Energy prices are going to have an important impact.”
The central bank’s interest rate will rise to 11 percent before reversing, he predicted.
TRENDPOST: Figure it out. Chile has an inflation rate of 13.1 percent and an interest rate of 9.75 percent. But in the EU, with inflation at 9.6 percent their central bankster interest rate is zero and in the U.S., with inflation at 9.1 percent the rate is between 2.25 and 2.50 percent. Thus, using the same ratios, the EU interest rates should be around 7 percent and the U.S. rate would be in the 6.7 percent range.
And for the EU to meet America’s low interest-rate-to-inflation standard, they would have to jack their zero rate up to nearly 3 percent.
BANK OF ENGLAND RAISES RATE TO ITS HIGHEST IN 14 YEARS
On 4 August, the U.K.’s central bank added a half-point to its base interest rate, raising the rate to 1.75 percent, its highest since 2008 during the Great Recession and the biggest single rate bump in 27 years.
The Bank of England has raised its rate four times already this year to stamp out inflation, which will exceed 13 percent in this year’s final quarter, the worst pace in 42 years, the bank has forecast.
Inflation also will remain “very elevated” for most of next year, the bank expects.
The U.K.’s economy will contract in this year’s final quarter, sparking a recession that will last throughout 2023, the bank warned.
TRENDPOST: As we have previously noted, when the International Monetary Fund lends nations money, they tell those borrowers that their interest rates should be one percent above their nation’s inflation rate. Using the IMF standard, with inflation expected to hit 13 percent by year’s end, the U.K.’s interest rates should be 14 percent.
Therefore, using the monetary mandates the money lenders enforced on those nations they loaned money to, U.K.’s interest rate at 1.75 percent will do nothing to stop inflation but will drag down its already dragging down economy, which will push the nation into Dragflation: Declining economy and rising inflation.
BRAZIL HIKES RATES AGAIN, SAYS EVEN HIGHER RATES ARE AHEAD
Brazil’s central bank added a half-point to its key Selic interest rate last week, setting it at 13.75 percent, and said a quarter-point increase is likely next month.
The Selic rate was 2 percent in March 2021.
The bank is struggling to rein back inflation, which rose to 11.39 percent in mid-July, the 11th consecutive month of double-digit price gains and one of the highest rates since 2003.
Recently, the government of president Jair Bolsonaro passed a $7.6-billion social aid plan that is designed to soften inflation’s impact on consumers but that also might push some prices higher.
The Selic rate is likely to peak at 14.25 percent, Fabio Kanczuk, chief of macroeconomics at Asa Investments.
Consumer prices will swell another 4.6 percent in 2023 and 3.5 percent in 2024’s first quarter, Brazil’s central bank predicted.
It sees inflation dropping to 4.6 percent next year and 3.25 percent in the first three months of 2024.
However, the international economy is “adverse and volatile, with marked downward revisions on prospective global growth,” the bank said, which creates uncertainty around forecasts.
Economists the central bank polled see inflation at 5.33 percent next year and have raised their forecast for 17 weeks running.
Although “they are heading toward the end of the tightening cycle,” the central bank “set a high bar for a rate hike of 25 basis points [a quarter-point] in the event that the outlook worsens,” partner Gustavo Pessoa at Legacy Capital, told Bloomberg.
TRENDPOST: By their interest rate/inflation numbers, compared to other nations as we have detailed above, Brazil is doing more to fight inflation than most other nations.
EUROZONE MORTGAGE INTEREST RATES JUMP, THREATENING HOUSING SALES
The average mortgage interest rate in the 19-country Eurozone rose from 1.78 percent to 1.94 percent from May to June, according to European Central Bank (ECB) data reported by the Financial Times.
The average is now .64 of a percent higher than the average last September, the FT noted, marking the biggest nine-month increase in borrowing costs since 2006.
In the U.K., mortgage rates now average 2.15 percent, up .65 of a point over the same period.
Germany’s rate added more than a point, jumping from 1.16 percent to 2.25; Italy’s went from 1.25 percent to 1.97.
Analysts, lenders, and the housing industry fear a housing market crash now that central banks are poised to continue raising interest rates to tame an as-yet unrelenting inflation and now that the ECB is no longer buying bonds.
TREND FORECAST: Inflation is running close to 9 percent and more sharply chafed by the Ukraine war that U.S. prices are.
The ECB has failed to raise interest rates enough to matter to inflation. To do that, the bank’s key rate would have to rise above seven percent; the bank has just raised it from -0.50 to zero.
Given the continent’s ongoing energy crisis, the ECB is unlikely to raise rates aggressively.
Consumers’ energy bills have gone up 400 percent or more in parts of Europe and will shoot higher as cold weather approaches.
All of these factors spell a crash in the region’s housing market before the end of this year.