With the RBA and US Fed meeting this week, we set to get an insight into just how high interest rates could go and when they might start to come down. | OPINION
After this week we’ll have a better understanding of whether we’re at the beginning of the end of the efforts by the major central banks to control raging inflation rates or at the end of the beginning.
It is the US financial markets – its bond and equity markets – that heavily influence the behaviour of markets and economies elsewhere, with the US settings impacting capital flows and currency relativities.The Fed’s rate hikes and the $US95 billion a month shrinking of its balance sheet as bonds and mortgages it accumulated during the pandemic are allowed to mature without reinvestment have outpaced the other central banks in tightening monetary conditions.
The positions of the BoE, with the UK inflation rate heading into double-digits, and the European Central Bank, which announced a 75 basis point rise in eurozone rates last week and has now raised its rates by 200 basis points in three months, are somewhat different to the Fed’s or RBA’s., than on the US or Australia.
The Fed also doesn’t know whether the rapidity with which it has tightened US monetary policy might trigger leverage or illiquidity-driven financial crises in its system, and/or elsewhere in the world.There’s also the unknown of how much inflation is still being driven by the effects and after-effects of the pandemic and the government and central bank responses to it and therefore how much of those influences might, or might not, work their way out of the system over time.
Overall, however, the US sharemarket has risen in the past fortnight or so, by about 9 per cent. Markets are forward-looking – they price in conditions somewhere between 12 and 18 months ahead – so, if the bounce back in markets could be sustained, it would say investors can see interest rates peaking and subsequently declining sometime next year.
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