There Aren’t Many Places In The World Left To Hide From Interest Rate Hikes

There Aren’t Many Places In The World Left To Hide From Interest Rate Hikes
Stéphane Renevier, CFA

almost 2 years ago1 min

A net 40% of central banks around the world are tightening their monetary policy – raising interest rates, easing quantitative easing, and so on – in a bid to reduce inflation. That’s the highest proportion since just before the global financial crisis in 2008, and it comes just two years after a net 60% of central banks were doing the complete opposite.

There are a couple of reasons that’s worrying. First, most assets have been benefiting substantially from lower rates and increased liquidity ever since the global financial crisis. Trouble is, they’ve also become increasingly reliant on them. So now that they’re losing this key support, their upside potential seems more limited and their downside risks have increased.

Second, it leaves investors with nowhere to hide. When there are only a few central banks in tightening mode, investors can switch their focus to regions that are easing. But right now, there are so many major economies clamping down that there isn’t exactly much to choose from. And while there are still a couple – Japan and China – with accommodative stances, they’re facing their own challenges in the form of slowing growth and deteriorating credit conditions.

And that’s not the only risk from so-called “synchronized tightening”. See, tighter monetary policy aims to slow down an overheating economy by making it more expensive to borrow money. But if a central bank goes too hard, too soon, the move can backfire: it can slow economic growth too sharply, and ultimately lead to a recession. And when several central banks tighten all at once, that risk only multiplies…

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