Fixed Income Research & Macro Strategy from 4X Global Research 29 October 2018
- Historically, central banks’ policy rates have tended to track core CPI-inflation, which excludes volatile items such as food and energy, rather than headline CPI-inflation, resulting in a broadly stable global “core” real policy rate.
- However, back in April central banks’ interest rate policies seemingly switched from tracking stable core to more rapidly rising headline CPI-inflation. The global “core” real policy rate has thus risen 23bp while the “headline” real policy rate has been more stable.
- This apparent turning point in central banks’ reaction functions holds true, to differing degrees, for both developed and emerging market (EM) economies.
- The developed central banks’ “core” real policy rate has increased 19bp to -0.45% – the high since early 2011 – while the “headline” real policy rate has been unchanged, which policy-makers would argue is sensible to avoid rising inflation becoming self-sustaining.
- The EM “core” real policy rate has increased nearly 30bp to 2.35%, near an 18-month high, while the “headline” real policy rate has dropped 44bp to its lowest level since early 2013 with a 65bp policy rate increase dwarfed by a 109bp surge in headline CPI-inflation spurred in part by rapid currency depreciation.
- The lagged and inverted relationship between the global “core” real policy rate and global GDP growth suggests that even slightly less stimulative interest rate policy could, in a leverage world, drag already slowing GDP growth lower in coming quarters. Moreover, higher international import tariffs could drive global inflation even higher and require further policy rate hikes while at the same time depressing global trade and GDP growth.
- The rise in the global “core” real policy rate has, perhaps unsurprisingly, already had a more immediate and negative impact on global equities, including in the US.
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