Yes, I am that old.*
Sometimes, when a group of big economies have been through some tough times together, but then find they are recovering at different speeds, they might have to start lowering their interest rates before the biggest one is ready. That doesn’t mean they don’t like each other anymore.
Back in March, the Swiss National Bank (SNB) cut its rate from 1.75% to 1.50%. Then in May, the Swedish Riksbank cut their rate from 4% to 3.75% because if your country name begins with an S you have to go first. That is the rule.
While important to the Swiss and Swedish, these economies are not known for setting the economic agenda for the Group of Seven, so few people had more than a raised eyebrow to say about it.
However, several eyebrows had to be picked up from the floor from sliding all the way down the back last week, when Bank of Canada and the European Central Bank cut their rates (Canada from 5% to 4.75%,EU from 4% to 3.75%.)
There were many feelings on the media interweb. Obviously, Canada and EU can do whatever they want and need. It’s not like we made some pact that we’d go together. We just thought that maybe…
Canadian inflation has come down, and it makes total sense they couldn’t wait much longer without jeopardizing a semi-soft landing. The Eurozone growth has almost come to a halt, and high rates are meant to curb the enthusiasm, not kill it.
Going ahead of the US is not without risk, though, especially if more rate cuts are on the schedule. High US rates mean that assets in USD are attractive mean that USD is strong means that other currencies are weak—relatively speaking.
Well, that spread just got bigger which can put a damper on the boost from the rate cut.
And this week, the US consumer price index came in a little lower than expected (yay), and the Fed held the rates (meh) and said, they now only see one rate cut this year (meh leaning towards nay).
That also makes sort of sense, since there is still some way to go from inflation at 3.something% to the coveted 2%.
Some pundits are wondering, though, if 2% inflation is reachable or even something to strive for. The concern about reachability is that, while it might be possible, an actual recession might be the cost.
And the Fed is free to say (or just set) their inflation target at 3% anytime, and then we would be (nearly) there. Settling on a little higher inflation might leave more wiggle room to cut or hike rates in the future, and who doesn’t like room to wiggle?!?
*In March 2014, Gwyneth Paltrow (of movies and Goop) and Chris Martin (of Coldplay) announced their separation with a statement saying they were consciously uncoupling. That did not go uncommented.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.