Are interest-rates on the rise now?

As we find ourselves heading into the second decade of the credit crunch era we find ourselves observing an interest-rate environment that few expected when it began. At the time the interest-rate cuts ( for example circa 4% in the UK) were considered extraordinary but the Ivory Towers would have been confident. After all they had been busy telling us that the lower bound for interest-rates was 0% and many were nearly there. Sadly for the Ivory Towers the walls then came tumbling down as Denmark, the Euro area , Sweden, Switzerland and Japan all entered the world of negative official interest-rates.

Even that was not enough for some and central banks also entered into sovereign and then other bond purchases to basically reduce the other interest-rates or yields they could find. Such QE ( Quantitative Easing) purchases reduced sovereign bond yields and debt costs which made politicians very happy especially when they like some official interest-rates went negative. When that did not work either we saw what became called credit easing where direct efforts went into reducing specific interest-rates, In the UK this was called the Funding for Lending Scheme which was supposed to reduce the cost of business lending but somehow found that  instead in the manner of the Infinite Improbability Drive in the Hitchhikers Guide to the Galaxy  it reduced mortgage interest-rates initially by around 1% when I checked them and later the Bank of England claimed that some fell by 2%.

What next?

Yesterday brought a reminder that not everywhere is like this so let me hand you over to the Reserve Bank of India.

On the basis of an assessment of the current and evolving macroeconomic situation at its
meeting today, the Monetary Policy Committee (MPC) decided to:
• increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis
points to 6.25 per cent.
Consequently, the reverse repo rate under the LAF stands adjusted to 6.0 per cent, and the
marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent.

There are two clear differences with life in Europe and the first is a rise in interest-rates with the second being that interest-rates are at or above 6% in India. It feels like another universe rather than being on the sub-continent but it does cover some 1.3 billion people. Sometimes we over emphasise the importance of Europe. As to why it raised interest-rates the RBI feels that the economy is going well and that inflation expectations are rising as domestic inflation ( official rents) has risen as well as the oil price.

The US

This has moved away from zero interest-rates and now we face this.

to maintain the federal funds rate in a target range of
1½ to 1¾ percent

It seems set to raise interest-rates again next week by another 0.25% which has provoked Reuters to tell us this.

With inflation still tame, policymakers are aiming for a “neutral” rate that neither slows nor speeds economic growth. But estimates of neutral are imprecise, and as interest rates top inflation and enter positive “real” territory, analysts feel the Fed is at higher risk of going too far and actually crimping the recovery.

Personally I think that they do not understand real interest-rates which are forwards looking. So rather than last months print you should look forwards and if you do then there are factors which look likely to drive it higher. The most obvious is the price of crude oil which if we look at the West Texas Intermediate benchmark is at US $65 per barrel around 35% higher than a year ago. But last month housing or what the US callers shelter inflation was strong too so there seems to be upwards pressure that might make you use more like 2.5% as your inflation forecast for real interest-rates. So on that basis there is scope for several more 0.25% rises before real interest-rates become positive.

One point to make clear is that the US has two different measures of inflation you might use. I have used the one that has the widest publicity or CPI Urban ( yep if you live in the country you get ignored…) but the US Federal Reserve uses one based on Personal Consumption Expenditures or PCE. The latter does not have a fixed relationship with the former but it usually around 0.4% lower. Please do not shoot the piano player as Elton John reminded us.

If we move to bond yields the picture is a little different. The ten-year seems to have settled around 3% or so ( 2.99% as I type this) giving us an estimated cap for official interest-rates. Of course the picture is made more complex by the advent of Quantitative Tightening albeit it is so far on a relatively minor scale.

The Euro area

Here we are finding that the official line has changed as we await next week’s ECB meeting. From Reuters.

Money market investors are now pricing in a roughly 90 percent chance that the European Central Bank will raise interest rates in July 2019, following hawkish comments from the bank’s chief economist on Wednesday.

In terms of language markets are responding to this from Peter Praet yesterday.

Signals showing the convergence of inflation towards our aim have been improving, and both the underlying strength in the euro area economy and the fact that such strength is increasingly affecting wage formation supports our confidence that inflation will reach a level of below, but close to, 2% over the medium term.

For newer readers he is saying that in ECB terms nirvana is near and so it will then reduce policy accommodation which is taken to mean ending monthly QE and then after a delay raising interest-rates.

So it could be a present from Mario Draghi to his successor or of course if he fails to find the switch a job he could pass on without ever raising interest-rates in his eight years as President.


Before I give my opinion let me give you a deeper perspective on what has been in some cases all in others some of our lives.

Since 1980, long-term interest rates have declined by about 860 basis points in the United States, 790 basis points in Germany and more than 1,200 basis points in France. ( Peter Praet yesterday)

On this scale even the interest-rate rises likely in the United States seem rather small potatoes. But to answer the question in my title I am expecting them to reach 2% and probably pass it. Once we move to Europe the picture gets more complex as I note this from the speech of Peter Praet.

the underlying strength in the euro area economy

This is not what it was as we observe the 0.4% quarterly growth rate in Euro area GDP confirmed this morning or the monthly and annual fall in manufacturing orders for Germany in April. Looking ahead we know that narrow money growth has also been weakening. Thus the forecasts for an interest-rate rise next June seem to be a bit like the ones for the UK this May to me.

Looking at the UK I expect that whilst Mark Carney is Bank of England Governor we will be always expecting rises which turn out to be a mirage. Unless of course something happens to force his hand.

On a longer perspective I do think the winds of change are blowing in favour of higher interest-rates but it will take time as central bankers have really over committed the other way and are terrified of raising and then seeing an economic slow down. That would run the risk of looking like an Emperor or Empress with no clothes.






17 thoughts on “Are interest-rates on the rise now?

  1. Shaun,
    Emerging Markets ( India ,Indonesia etc) seem to be sufferingr from US actions with the Fed balance sheet reduction whilst Treasury issuing more bills results in $ shortages elsewhere?

    • Hi Chris

      Yes the squeeze was put on the EMs or Emerging Markets but I think that was driven more by the stronger US Dollar phase than higher US interest-rates. Of course the two often come together but not always as we saw for quite a while. But yes I did a post on this a week or two ago and it is still in some respects amazing that you can have a $ shortage after all the QE liquidity creation but yes it does seem to be true.

    • Hi Dutch

      Yes and what was that about cockroaches scuttling off when you turn on the light?

      “JUST IN: Deutsche Bank chair has spoken to top shareholders about merging with rival Commerzbank” ( Bloomberg around 3 hours ago).

  2. How long exactly, given his prior prevarications on interest rate increases, does any sane person think it will be before Carney raises rates in the Uk to 2%???

    Given such a large proportion of mortgages are now fixed rate and would not be affected by the higher rates for many years and the fact that an increase of just over 1% from current rates would easily be absorbed by the vast majority of households, and that credit card debt and motor finance are at such high rates already that a couple of % would make virtually no difference to the monthly repayments(mid twenties% for credit card debt) it is difficult to imagine why Carney is so petrified of the consequences of raising rates.

    Unless there is another reason.

    It wouldn’t be that the already insolvent banks would then be driven further into insolvency by adding to the losses from their speculation on credit derivatives and mortgage backed securities that are so massive that after ten years of ZIRP and QE they have still not cleared would it???

    Oh and it looks like the government has even given up on pretending the initial “investment” in RBS will pay off, having paid just over a fiver a share they recently sold about 10% of their holding at £2.71, netting a tidy £2.1 billion loss for the UK taxpayer, who paid £5.02 per share in the bailout, but they still own around 60% of the company, so are still liable for the lawsuits coming down the pipe for the GRG crime syndicate:

    Isn’t capitalism great?

    • Capitalism is where you allow the company to go bust any you pick up the pieces you want with capital at the best price possible.

      That is Darlingism, the financially retarded Blairite #### who thought this a good idea.

  3. I am more than happy to make inflation predictions but I wouldn’t stake my own money on them, markets have long ago moved from fundamentals and amateurs get eaten alive in those circumstances. For America inflation remains benign because wages are not moving and what’s more there is no prospect of them moving.

    I’m sure things never used to be this complicated as Avril Lasagna.. err began with L… almost sang.

    • Hi bill40

      Well if you want something really complicated there are of course the rumours that Avril Lavigne is dead. From the NME.

      “The theory alleges that Lavigne “died” in 2003 at the age of 19, a year after the release of her debut album ‘Let Go’. Her second album ‘Under My Skin’ was released in 2004 and the blogger insists that the title “is very suggestive” of the truth. Is it?

      They add that just before this album came out in 2004, band member and close friend Evan Taubenfeld left her group. He addressed this in a duet with Lavigne, called ‘The Best Years Of Our Lives’, with the line “I never thought I would lose my best friend“, which the blog suggests means he must have known that it was the “new” Lavigne on the track.”

      About as likely as the Paul McCartney rumours I think…..

  4. Interesting that the Chinese central bank rate is 3.5% and th3 governor seems to be following a policy of shadowing the Fed (presumably to maintain the fx rate? ). Thus China has a property bubble, but India does not. However, India and Indonesia are worried about a bond sell-off, which is effectively pressure to raise rates. Apparently the spread between Italian bonds and Greek bonds is now less than with Spanish bonds. With Trump’s trade war and growing nervousness about bad debt found in the banks of emerging economies, notably India, the world is simply becoming nervous about debt default and so, rate rises are quite likely, both reflecting commercial bank issues and fx rates. I saw a report yesterday that emerging market governments are more likely to allow defaulting companies to go bust – which would suggest there are too many of them for the state to support.

    Carney will of course “see through” all of this as theGBP slides.

    • Hi David

      Yes it will be “temporary” and “transitory” until it is “my goodness it is time for my flight back to Montreal”. As to Italian bonds it was a poor pattern today where the money rally fizzled out and then the BTP future ended up a point down. We keep seeing these failed rallies.

  5. Hi Shaun,

    In August 2009 I made a $10 bet with my neighbour that the UK base rate will be .5% on 5 March 2019). $10 is an indication of how sure I was and I would probably be better off If I lost!

    From the BBC, March 2009 –
    Bank Governor Mervyn King said the policy would “eventually work”.
    “Nothing in life is ever certain, but these measures we think will work in the long-term,” he said.
    “I don’t know how long it will take, much depends on the situation in the rest of the world. But if countries work together, these measures will I believe eventually work.”

    The question is when is “eventually”?
    In the long-term we’re all dead anyway. (Thank you, Prof. Brian Cox)

    Or as Lewis Carroll put it-
    Either it was a very deep well or she was falling very slowly for Alice had plenty of time to look about her and wonder what was going to happen next.

    I think the bust banks have proven to be a very deep well. And we’re falling slowly.

  6. House of Fraser is latest casualty of catastrophic mismanagement of our economy for the last 4 decades,the on line excuse is a smoke screen.
    The truth is debt has risen exponentially wages have stagnated or fallen the country is only keeping its head above water through suppressed interest rates,just imagine what is going to happen when they rise no wonder Carney the con man is waffling like he doesn’t know what to do,it is the no win scenario…..there is no way out.
    Watching the BBC with its usual ignore the elephant in the economy reporting.

    • Hi Private Fraser

      Yes sad news and I presume no relation. So much of the battle seems to be around rents being too high and I recall a sports shop on the Kings Road that went under because rent and rates were over £900k a year. That;s a lot of T-shirts and shorts and running shoes.

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