Central bank activity is picking up right where it left off in January, when global central banks took aggressive action to combat the deflationary headwinds in their economies. In the last month, 16 central banks – an unprecedented number – cut their interest rates, with many lowering their rates on unscheduled meetings. Denmark lowered its rates three times in a 10-day period. This activity is feeding the notion of a global currency war.
This week, the Reserve Bank of Australia (RBA) surprised many in the market, cutting its interest rates by 25 basis points to 2.25%, an all-time low, and sending the Australian dollar to a 5 ½-year low. Markets are now pricing in another interest rate cut in the months ahead. Australia, like many other commodity-rich countries, has been feeling a severe pinch from sharply declining commodity prices and a slowing Chinese economy. With so many of Australia’s competitors cutting their interest rates, the RBA felt compelled to act sooner rather than later to try and lower the value of its currency.
While there has been no official change in the U.S. Federal Reserve’s policy since January, U.S. interest rates have not remained stagnant. Since the beginning of January, U.S. 10-year yields have fallen well over 50 basis points down to a multi-year low of 1.64%. A flight to safety, combined with weak U.S. economic data, have caused U.S. interest rates to soften and changed the timeline for the Fed to begin normalizing U.S. interest rates.
The sharp decline in energy and commodity prices have set in motion a secular decline in inflation. For now, we have not seen a bottom in oil prices and the deflation that many of the central banks are witnessing is compelling them to take action both domestically and internationally.
My View: We are not looking for a repeat of January’s alarming central bank activity in the months ahead. Markets like stability and certainty. Energy and commodity prices need to find a floor to help stabilize inflation, and we have not seen that. Once that occurs, central banks can resume their normal modes of operation.
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