Central Bank Interest Rates – more increases in the horizon

Jerome Powell US Fed Chair increased the Fed Funds Rate by 0.75% last week to 3.25% and has signalled that he will do what is required to get the inflation rate down to the 2% target. Policy rates are still negative almost everywhere, the main exceptions being China, Brazil, Hong Kong, and Saudi Arabia. Mexico and Indonesia are almost there, too.

Thoughts from the Frontline – Mauldin Economics.

If there is a negative real interest rate, it means that the inflation rate is greater than the nominal interest rate. If the interest rate is 2% and the inflation rate is 10%, then the borrower would gain 8% of every dollar borrowed per year. In the early 1970s, the US and UK both reduced their debt burden by about 30% to 40% of GDP by taking advantage of negative real interest rates.

It is possible to control inflation while keeping real rates well below zero but it is more likely that reducing demand will require raising real rates at least to 0%, and probably a bit higher. Higher interest rates globally are on the horizon as at present they aren’t high enough to significantly reduce inflation pressure in most countries. Central banks have work to do.

Source: Mauldin Economics


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