Global Interest Rate Shifts and Regional Trends

Week Ending, 22nd March, 2024

JAPAN (as expected) finally ended negative rates by hiking its policy target range to a range of 0% to 0.1% (previously it was -0.1%). Governor Ueda said this is not necessarily the start of a series of hikes. The Yen continued to decline even after the decision. It marks the first hike in 17 years. The BoJ indicated it will gradually reduce its purchases of commercial paper and corporate bonds with a view to discontinue purchases in a year. Together, these moves would mark the end of the bank’s Yield Curve control policy. He did say the BoJ will remain accommodative for the “time being” and “for as long as necessary to stably achieve its 2% inflation target”. Top banks have said they will raise rates on deposits from 0.001% currently to 0.02% - hardly earth-shattering and a clear sign that Japanese assets will not shift overnight. It will take time unless there is a massive shift.
There were two unexpected surprises:

TAIWAN raised rates a notch to 2.0% (from 1.875%) citing a hike in power prices at a time when inflation (mostly due to food price increases) still persists and TURKEY shocked markets with a +5% hike in its interest rate to 50%. The surprise move comes 10 days before nationwide local elections. Its central bank is determined to tackle the country’s 70% inflation rate.

Elsewhere, there were no surprises from the US, UK, AUSTRALIA, CHINA, NORWAY & RUSSIA. In the case of the US, the language didn’t change much (after all, what more can he say…..there are few words left in the dictionary to keep describing the same thing!). See below the famous dot plot (courtesy: Bloomberg) which shows, for the 19-member committee, what their projections/thinking are on the rate outlook.

Comparing the dot plot forecasts between December 2023 and March 2024, there is now a shift to mostly 3 cuts. Only one is forecasting 4 cuts. Two are saying no rate cut at all! Overall, Powell seemed relaxed about the predicted rise in year-end inflation while financial conditions remain fairly lax. On QT (Quantitative Tightening, the shrinking of the Fed’s balance sheet which has shrunk already by some $1.43tn) he was asked when this shrinking will slow. He replied, “fairly soon”. What he didn’t say is it will stop! So basically, by going slower, you can go further is one interpretation.

RUSSIA’s central bank held rates at 16% citing inflationary pressures remain high. It said domestic demand is still outstripping the ability to expand the production of goods and services while labour market tightness has increased again.

SWITZERLAND cut its key rate to 1.5% (from 1.75%) citing inflation is now back to well withing the central bank’s target (2%) range (Feb: 1.2%).

Finally, in terms of other key signs / indicators:

CHINA: Property investment fell but at a slower rate of -9.0% y/y for the first two months (Jan to Feb) of this year. Contrast this with -24.0% y/y as of Dec. 2023. Sales by floor area fell -20.5% y/y (vs Dec. 2023: -23.0% y/y). It’s early days and we will need more data but there are signs some of the stimulus measures are starting to trickle through.

EUROPE: Loan defaults have not been as severe as was expected, so much so, that debt collectors are rethinking and consolidating their businesses. Banks have finished their “clean-up” of bad loans, especially in Europe’s south. This has been driven on two fronts – Private Capital firms buying up cheap debt from banks and government support measures. Non-Performing Loans (NPLs) have stayed steady at 1.8% for six, straight quarters. Take Italy as an example - which has been the biggest for bad debts – bad debts have slid to €31bn, a mere one-third of the 2018 peak.

INTEL is expected to receive $23bn in subsidies plus another $25bn in ITCs (Investment Tax Credits) as part of a total $100bn investment programme over 5 years in chip-making capacity, research and development and advanced packaging projects. On Wednesday (20th) it has signed an $8.5bn “non-binding” memorandum of terms under the CHIPS and Science Act (designed to bring back semiconductor manufacturing to US soil) that doesn’t have to be paid back plus up to $11bn in loans. Intel is the biggest chipmaker to make a deal under the CHIPS Act so far. Smaller subsidy deals have been announced by the US entity of BAE Systems, Microchip Technology and GlobalFoundries. Many other companies have lined up for such handouts. The irony in all this is that Intel used up $94bn in cash to buy back its shares (though it hasn’t bought any more since 2021 when it had a change in CEO).

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