Central banks start to take back last year's rate cuts

Kieran Davies

Coolabah Capital

Central banks have started to take back last year's rate cuts as their economies have recovered from last year's recession, lifting policy interest rates after slashing them during the pandemic. This is true for central banks in both advanced economies - where several countries are also either winding back or stopping buying government bonds - and emerging markets.  

In advanced economies, the weighted policy rate across all countries has increased marginally from a record low of 0.07% to 0.14% over recent months, with 6 out of 17 central banks raising rates, the largest of which have been the UK and Korea. Prior to the pandemic, the advanced economy policy rate was 0.8%.

In emerging markets, the weighted policy rate across all economies has increased from 4.5% to 5% over recent months, with 10 out of 21 central banks raising rates and 3 banks cutting rates (Indonesia, Turkey and North Macedonia). Prior to COVID, the emerging market policy rate was 5.5%.  

Unless COVID derails the economic recovery, the trend to higher policy rates should continue in 2022.  Importantly, the Federal Reserve recently signalled that it is likely to stop buying bonds early next year and join in taking back rate cuts later in 2022. 

Locally, the RBA is weighing up stopping buying bonds in February, which in our view is likely (ie, QE should end in mid February). Yet the RBA is still reluctant to raise rates until wages growth is fast enough to keep inflation in the 2-3% target band. The RBA thinks this will probably take until 2024 - or 2023 at a stretch - but the ongoing decline in the unemployment rate raises the risk of earlier action in late 2022 or the first half of 2023.   

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Kieran Davies
Chief Macro Strategist
Coolabah Capital

Based in Sydney, Kieran Davies joined Coolabah Capital in 2020, an asset manager than runs over $7 billion in fixed-income strategies, and is responsible for macroeconomic research and investment strategy, contributing to the investment decisions...

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