21 Rue Glesener, 1631 Gare Luxembourg, Luxembourg

Picture of the author

Client area

0311 2023


The rhythm of interest rates. How investors dance with central banks on a floor of inflation

Rowan Rozemond

Central banks are constantly adjusting interest rates in their battle with inflation. Like a tango: helping, pressing, and solving, but ruthless for everyone who’s involved. A move to the right, a move to the left. A drop on the floor and a pull-up in the air. You as an investor would do well with a solid game plan and a good feel for the rhythm. While interest rates have been rising for a long time now, in September, for the first time in nearly a year, major developed economies decided against rate hikes. This strategic pause, coupled with emerging markets' varying approaches, paints a complex picture. Because who knows what the banks will do in the near future? Let’s dive into the latest picture made simple, and how you can lead the music.

What’s Going On: The Central Banks' September Standstill

During September, central banks across major developed economies opted for stability. The Bank of Japan, European Central Bank, Reserve Bank of Australia, Reserve Bank of New Zealand, and Bank of Canada all chose to keep their benchmark rates unchanged. These decisions marked a departure from the series of rate hikes seen in the early months of the year when central banks overseeing the 10 most traded currencies collectively implemented 36 hikes totaling 1,150 basis points.

One of the contributing factors to this policy shift was the significant increase in global bond yields, particularly at the long end of the yield curve. This development prompted central banks to take a pause in their rate-hiking spree. The rise in bond yields exerted a form of tightening, leading to a reconsideration of the pace of further hikes. Analysts suggest that central banks, including the U.S. Federal Reserve, may be nearing the end of their rate hike cycles as they evaluate the impact of earlier hikes on their respective economies.

Divergent Paths in Emerging Markets

While developed economies paused, emerging markets displayed divergent trajectories. In October, 12 out of the 18 central banks convened meetings, according to Reuters. Notably, Latin American and Central European countries led the way in easing their monetary policies. Countries like Chile, Hungary, and Poland extended their rate-cutting cycles, collectively lowering benchmark rates by 150 basis points. This swift return to rate cuts was, in part, a reaction to the rapid pace of earlier rate hikes.

On the other hand, Asian central banks continued to follow tightening cycles. Both Indonesia and the Philippines raised their rates by 25 basis points each. Meanwhile, Russia and Turkey, dealing with unique currency challenges, significantly increased their benchmark rates by 200 and 500 basis points, respectively. Some countries, such as Brazil, Mexico, South Africa, Thailand, Malaysia, and the Czech Republic, did not convene in October.

Rowan Rozemond, DHF Capital S.A. Head of Investor Relations, predicts that high-interest rates will linger for a longer time. “We remain in a climate in which higher interest rates stay the dominant force. That’s because central banks want to lower the excessive money supply, added since the beginning of market disruption due to the Covid crisis in 2020. This money was brought into the cycle and now needs to be tempered. The capital we talk about is brought into the M2 region, which contains the total money supply, including all of the cash people have on hand and money deposited in checking accounts.”

The year's tally for rate hikes stood at 4,225 basis points, the result of 34 hikes, while central banks executed 570 basis points of rate cuts across 11 moves. “With higher interest rates, the FED is able to cushion the economy during a recession with quantitative easing,” Rozemond explains. “In other words: the size of the FED’s balance sheet is lowered.”

What This Means for You as an Investor

So, banks are tossing and turning. Consumers are tightening their spending. The shifting interest rate landscape significantly impacts investors like you as well. Volatility in the financial markets is closely tied to these rate adjustments, making it essential for investors to stay informed and adapt their strategies accordingly. Do you want to miss the boat? If not, keep this in mind:

  1. Diversification: A well-diversified portfolio can help mitigate the impact of interest rate changes. Consider different asset classes, including stocks, bonds, and real estate, to spread risk.

  2. Risk Management: Evaluate your risk tolerance and align your investments with your financial goals. Certain investments may be more resilient to interest rate fluctuations.

  3. Long-Term Perspective: Focus on your long-term financial objectives rather than short-term market volatility. Keep in mind that short-term interest rate movements are just part of the broader economic cycle.

  4. Expert Guidance: Seek guidance from financial professionals who can help you navigate the complexities of a changing interest rate environment.

Secure your assets, thrive in your financial future

The world of finance is in a state of flux, with central banks in developed economies reevaluating their interest rate policies. No one dares to shut off the music. This dynamic environment underscores the importance of having a well-thought-out investment strategy and a partner in crime. With expert guidance and investment options that align with your financial goals, DHF Capital S.A. makes the difference. Want to know how we do that? Contact us any time. Your financial future is secured, with the goals of today.

Rowan Rozemond

Related Posts

1612 2022

Inflation past its peak, recession approaches. Why that's not only bad news

2302 2023

Reflecting on YOY inflation ratio shows explicitly: investing pays off

Copyright 2014-2023 DHF Capital S.A. All Rights Reserved

Picture of the author